Iran's Economy

Iran’s Economy
Updated August 22, 2008
Shayerah Ilias
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Iran’s Economy
The Islamic Republic of Iran, a resource-rich and labor-rich country in the
Middle East, is a central focus of U.S. national security policy. The United States
asserts that Iran is a state sponsor of terrorism and that Iran’s uranium enrichment
activities are for the development of nuclear weapons. To the extent that U.S.
sanctions and other efforts to change Iranian state policy target aspects of Iran’s
economy as a means of influence, it is important to evaluate Iran’s economic
structure, strengths, and vulnerabilities.
Iran faces several external challenges to its economy. Iran has long been subject
to U.S. economic sanctions and, more recently, to United Nations sanctions. Partly
due to the sanctions, some foreign countries and companies, particularly in Europe,
have curbed trade and business with Iran. Iran also has faced challenges in obtaining
foreign investment for development of its energy sector. Iran has turned to new
trading partners, such as China and Russia, and has focused more heavily on regional
trade opportunities.
A significant internal challenge is reported domestic economic mismanagement.
With the election of President Mahmoud Ahmadinejad in 2005, Iran’s economic
policies have worked to reduce regional and class disparities through oil wealth
redistribution. Ahmadinejad has tried to reduce unemployment and poverty through
expansionary monetary and fiscal policies, including large energy subsidies and
subsidized lending. However, some criticize these policies for contributing to
unemployment and inflation and not reducing poverty.
Another domestic vulnerability is Iran’s dependence on its oil sector; the
government’s chief source of revenue is from oil exports. Iran has experienced
strong economic growth in recent years due to the rise in international oil prices, but
remains susceptible to oil price volatility. Iran has taken steps to diversify its
economy, such as through building up its non-oil industry sectors.
Because Iran does not have sufficient refining capacity, the country is highly
dependent on gasoline imports to meet domestic consumption needs. To reduce this
dependency, the country is seeking foreign investment to develop its petroleum
sector. While some deals have been finalized, reputational and financial risks may
have limited other foreign companies’ willingness to finalize deals.
Some analysts maintain that Iran’s economy is performing robustly; others
suggest that the economy is underperforming, given the country’s vast resources.
Despite the challenges faced by Iran, most analysts believe that the economy is not
in immediate crisis, given the continued highs in oil prices.
Members of Congress are divided about the proper course of action respect to
Iran. Some advocate a hard line, while others contend that sanctions are ineffectiveth
at promoting policy change in Iran and hurt the U.S. economy. In the 110 Congress,
several bills have been introduced that reflect both perspectives. This report will be
updated as events warrant.

In troduction ......................................................1
Background ......................................................1
Overview of Iran’s Economy.........................................3
Economic Growth.............................................4
Inflation .....................................................6
Unemployment ................................................7
Economic Policy and Reform Efforts..................................7
Third Five-Year Plan (2000-2004) ...............................8
Fourth Five-Year Plan (2005-2009)................................8
Redistribution Policies......................................8
Economic Mismanagement Concerns..........................9
Economic Stakeholders............................................10
Bonyads ....................................................10
Islamic Revolutionary Guard Corps...............................11
Private Sector................................................13
Economic Sectors.................................................14
Oil and Gas .................................................14
Oil ....................................................15
Oil Sector Dependence....................................15
Natural Gas and Gasoline..................................16
Gasoline Supplies........................................17
Foreign Involvement in Oil and Gas Development...............17
International Sanctions on Oil and Gas Sector Development.......19
Agriculture ..................................................20
Manufacturing ...............................................21
Steel ...................................................21
Automotives .............................................21
Food Products...........................................22
Petrochemicals ...........................................22
Manufacturing and International Sanctions.....................22
Banking ....................................................22
Tehran Stock Exchange....................................23
Financial Sanctions.......................................23
Money Laundering........................................25
Informal Finance Sector....................................26
International Trade................................................26
Major Trading Partners........................................27
Germany ................................................29
United Arab Emirates and Transshipment Trade.................29
New Trading Partners.....................................30
U.S.-Iranian Trade........................................31

Trade Liberalization...........................................33
Sources of Foreign Exchange.......................................34
International Reserves.........................................34
International Investment........................................34
International Loans and Assistance...............................35
World Bank.............................................35
Bilateral Official Development Assistance.....................35
U.S. Policy Concerns..............................................38
Susceptibility of Iran’s Trading Partners to U.S. Pressure..............38
Impact of Iranian Sanctions on U.S. Economy......................39
U.S. Policy Options...............................................40
Recent Congressional Action....................................42
List of Figures
Figure 1. Real GDP Growth in Iran, FY2003-FY2008.....................5
Figure 2. Real GDP Growth in Iran, Middle East and Central Asia, and Oil
Exporting Countries, FY2003-FY2008.............................6
Figure 3. Iran’s Exports to Select Countries, FY2000-FY2007..............28
Figure 4. Iran’s Imports From Select Countries, FY2000-FY2007...........29
List of Tables
Table 1. Iran Overview.............................................4
Table 2. Iran Merchandise Trade, FY2004-FY2007......................27
Table 3. Major Export Markets and Sources of Imports for Iran, FY2007.....28
Table 4. U.S.-Iranian Trade, FY2000-FY2007..........................31
Table 5. Net ODA to Iran from OECD DAC Members, 2001-2006 .........36

Iran’s Economy
The Islamic Republic of Iran, a resource-rich and labor-rich country in the
Middle East, is a central focus of U.S. national security policy. The United States has
designated the Iranian government as a state sponsor of terrorism. The
Administration’s 2006 U.S. National Security Strategy argues that the United States
“may face no greater challenge from a single country than from Iran.”1 The United
States contends that Iran is a destabilizing force in the Middle East and 0expresses
concern about its growing influence in the region and internationally. The Bush
Administration has accused Iran of arming Shiite militias in Iraq, providing support
to Hezbollah and Hamas, and inflaming sectarian strife in the Middle East. The
Administration also has decried Iran’s uranium enrichment activities, which it alleges
are being used to develop nuclear weapons.
This report provides a general overview of Iran’s economy, addresses related
U.S. policy concerns, and discusses policy options for Congress. The purpose of this
report is two-fold. First, it provides insight into important macroeconomic trends,
policy reforms and objectives, key economic sectors, international trade patterns, and
sources of foreign exchange. Second, in the context of U.S. economic sanctions
imposed for national security and foreign policy reasons, it evaluates Iran’s economic
structure, strengths, and vulnerabilities and discusses U.S. policy concerns.
While some analysts maintain that Iran’s economy is performing robustly, others
suggest that the economy is underperforming, given the country’s vast resources.
External challenges faced by Iran’s economy include U.S. and United Nations (U.N.)
sanctions and other forms of U.S.-led pressure. Internal challenges include high
inflation and unemployment levels, domestic economic mismanagement, dependence
on the oil sector for export revenues, and dependence on gasoline imports. Despite
the challenges faced by Iran, most analysts believe that the economy is not in
immediate crisis, given the current highs in oil prices. This report will be updated
as warranted by events.
The 1979 Islamic revolution changed Iran’s modern political and economic
history. Ayatollah Ruhollah Khomeini and his supporters transformed Iran into an
Islamic state with a public sector-dominated economy. Iran’s economy subsequently
was dealt a difficult blow by the Iran-Iraq war (1980-1988). In the post-war era, Iran

1 “The National Security Strategy of the United States of America - 2006,” March 2006.

has strived to rebuild war-torn local production, attract international investment,
enhance foreign relations, liberalize trade, and, more recently, redistribute wealth
under a series of a five-year economic plans.
Iran is the second largest oil producer in the Organization of the Petroleum
Exporting Countries (OPEC). The country’s oil and gas reserves rank among the
world’s largest. Iran’s economy is largely dependent on oil and is highly susceptible
to oil price shocks. The 1973 oil price bust sent the economy spiraling into crisis,
while recent oil price surges have increased Iran’s export revenue and reserves.
Since the 1979 U.S. embassy hostage crisis in Tehran, Iran has been subject to
various U.S. economic sanctions. Such actions have been motivated over time by
concerns regarding Iran’s nuclear program and support for terrorist organizations.
More recently, the United States increasingly has focused on targeted financial
measures to isolate Iran from the U.S. financial and commercial system. Sanctions
have been imposed in order to change the Iranian government’s policies with respect
to its nuclear program and support to terrorist organizations. To that end, the United
States has imposed sanctions to curtail the development of Iran’s petroleum sector
and constrain Iran’s financial resources in a way that motivates policy change in Iran.
The United States also has applied diplomatic pressure on foreign countries and
companies to limit business with Iran.2 In addition to the United States, some
European Union states and other countries have imposed sanctions on Iran in line
with U.N. moves.
The United States also has pushed for stronger international sanctions against
Iran in the U.N. Most recently, in March 2008, the United Nations Security Council
(UNSC) passed a third round of sanctions against Iran through Resolution 1803,
calling for the inspection of suspicious international shipping to and from Iran that
are suspected of carrying prohibited goods. It encourages greater monitoring of
named Iranian financial institutions, travel bans for named Iranians, and freezes
additional assets related to Iran’s nuclear program.
In June 2008, the five permanent members of the UNSC (Britain, China,
France, Germany, Russia, and the United States) and Germany offered to suspend
further sanctions against Iran if Iran agreed to halt its uranium enrichment program
and begin negotiations on constraints of its nuclear activity.3 The six countries
considered Iran’s response unclear, and in August 2008, they agreed to pursue a
fourth round of U.N. sanctions against Iran.4

2 For more information on U.S. sanctions against Iran, see Kenneth Katzman, CRS Report
RL32048, “Iran: U.S. Concerns and Policy Responses.”
3 “U.S. Pushes for Tighter United Nations Sanctions Against Iran,” The Oil Daily, August

7, 2008.

4 Jonathan S. Landay, “U.S., 5 other nations to seek tougher sanctions against Iran,” The

Iran has opposed U.S. and U.N. sanctions vehemently. The country has long
maintained that the purpose of its uranium enrichment program is to produce fuel for
nuclear power reactors, rather than fissile material for nuclear weapons. The
government asserts its right to develop nuclear energy for peaceful purposes. Iran
increasingly has questioned the justification of the sanctions in light of some recent
positive reports on its nuclear activities. A November 2007 U.S. National Intelligence
Estimate (NIE) assesses that Iran stopped its nuclear activities for weapons
proliferation in 2003.5 Iran and the International Atomic Energy Agency (IAEA)
agreed in August 2007 on a work program that would clarify the outstanding
questions regarding Tehran’s nuclear program. Iran has clarified some questions, but
a May 2008 report by the IAEA raised major new questions about Iran’s nuclear
Overview of Iran’s Economy
Macroeconomic indicators for Iran provide a mixed picture of the country’s
economic situation. While the Iranian government asserts that its economy is
performing robustly, there are elements of Iranian society that express concern about
economic conditions. Some analysts raise questions about the economy’s long-term
viability and contend that currently rising international oil prices mask
vulnerabilities in the economy. The following section discusses certain
macroeconomic indicators of Iran’s economy (Table 1 provides a summary of basic
country and economic indicators).7

4 (...continued)
Anniston Star, August 5, 2008.
5 NIE, “Iran: Nuclear Intentions and Capabilities,” November 2007, accessible at
6 IAEA, “Implementation of the NPT Safeguards Agreement and relevant provisions of
Security Council 1737 (2006), 1747 (2007) and 1803 (2008) in the Islamic Republic of
Iran,” Report by the Director General, May 26, 2008,
[ ht t p: / / www.i aea.or g/ Publ i cat i ons/ Document s / Boar d/ 2008/ gov2008-15.pdf ] .
7 Economic data for this report is largely based on data from the International Monetary
Fund (IMF). As a member of the IMF, Iran reports on its economy to the IMF. The
economic data is limited in its means of independent verification by the IMF. In addition,
this report relies on data from the Economist Intelligence Unit and Global Insights,
international economic research and forecasting agencies. U.S. government sources of data
include the Central Intelligence Agency for general economic indicators and the Census
Bureau for trade data.

Table 1. Iran Overview
Indicator D escription
Land Area1.6 million square kilometers (slightly larger than Alaska) (CIA)
Population65.9 million (CIA)
Median Age26.4 years (CIA, July 2008 estimate)
Head of StateMahmoud Ahmadinejad, elected as President in August 2005
Life Expectancy at70.9 years (CIA, 2008 estimate)
Gross Domestic$753 billion (purchasing power parity);
Product (GDP)$294 billion (official exchange rate) (CIA, 2007 estimates)
GDP Real Growth6.2% (IMF, FY2007 estimate)
GDP Per Capita$10,600 (CIA, 2007 estimate)
GDP Composition atOil and gas, 27%; industry, 17%; services, 46%; agriculture,
Factor Cost (Current10% (IMF, 2008)
Unemployment Rate12%, reported by Iranian government (CIA, 2007 estimate)
Population Below18% (CIA, 2007 estimate)
Poverty Line
Inflation Rate18.4% (IMF, FY2007 estimate)
(Consumer Prices)
Exports$91 billion (IMF, FY2007)
Export CommoditiesPetroleum, chemical and petrochemical products, fruits and nuts,
carpets (CIA)
Imports$55 billion (IMF, FY2007)
Import CommoditiesIndustrial raw materials and intermediate goods, capital goods,
foodstuff and other consumer goods, technical services (CIA)
Sources: Central Intelligence Agency (CIA) Factbook; IMF, Direction of Trade Statisticsstth
Note: The Iranian fiscal year runs from March 21 to March 20.
Economic Growth
Since 2000, Iran has experienced positive rates of real economic growth
(percentage change GDP). According to the International Monetary Fund (IMF), the
annual change in real GDP registered at 6.2% for FY2006 and was estimated to reach

6.4% in FY2007 (see Figure 1).8 Iran’s recent economic growth can be attributed
to a combination of factors, including rising international oil prices, regional
economic growth, expansionary monetary and fiscal policy reforms under President
Ahmadinejad, and weather-related agricultural recovery.9
Iran’s non-oil real GDP growth was strong, at 6.2% for FY2006 and an
estimated 6.6% for FY2007. Growth in non-oil GDP is due to government support
for priority sectors, expansionary economic policies, and increased growth in credit.
In comparison, real oil and gas GDP growth has been less, at 3.0% for FY2006 and

1.1% for FY2007. Oil-related economic growth has been modest partly due to10

inadequate investment in Iran’s energy sectors.
Figure 1. Real GDP Growth in Iran, FY2003-FY2008

6angOverall Real GDPGrowth
5 ChNon-Oil Real GDP
3tagOil Real GDP Growth
-1 200 3 20 04 2005 20 06 2 007 200 8
Source: IMF, “Regional Economic Outlook: Middle East and Central Asia,” May 2008.
Notes: FY2007 data are estimated and FY2008 data are projected.
Oil real GDP growth represents economic growth from the oil and gas sectors.
Non-oil real GDP growth represents economic growth from other sectors.
In the past, Iran’s economic health has fluctuated partly due to external shocks.
During the 1960s and 1970s, Iran’s economy experienced real economic growth rates
nearing 10%, one of the world’s highest. With the 1979 revolution, the Iran-Iraq war,
and growing international isolation, Iran faced negative rates of real economic growth
during the 1980s. Throughout the early 1990s, Iran experienced post-war economic
recovery. However, the country faced a severe economic downturn in the latter part
of the decade due to a drop in international oil prices.11
8 Iran’s fiscal year runs from March 21st to March 20th.
9 IMF, “Islamic Republic of Iran: 2008 Article IV Consultation ,” IMF Country Report No.

08/284, August 2008, p. 7.

10 Ibid.
11 Abdelali Jbili, Vitali Kramarenko, and José Bailén, “Islamic Republic of Iran: Managing

Although Iran’s economic growth appears to be on the upswing currently, it
continues to fall short of average economic growth of the Middle East and Central
Asia overall and for oil exporting countries in general (see Figure 2).12
Figure 2. Real GDP Growth in Iran, Middle East and Central Asia,
and Oil Exporting Countries, FY2003-FY2008

5e CMiddle East and
4tagCentral Asia
3cenOil Exporters
200 3 20 04 2 005 20 06 2 007 200 8
Source: International Monetary Fund (IMF), “Regional Economic Outlook: Middle East and
Central Asia,” May 2008.
Notes: FY2007 data are estimated and FY2008 data are projected.
Oil-exporters consist of Algeria, Azerbaijan, Bahrain, Iran, Iraq, Kazakhstan, Kuwait, Libya,
Oman, Qatar, Saudi Arabia, Syria, Turkmenistan, and the United Arab Emirates.
Other macroeconomic indicators suggest Iran faces some challenges. Inflation
levels consistently have been in the double-digits. Average Consumer Price Index
(CPI) inflation reportedly reached 11.9% in FY2006 and was estimated to hit 18.4%
in FY2007. According to IMF projections, CPI inflation will surpass 20% for
FY2008.13 Domestic factors contributing to the rise in inflation include expansionary
government economic policies and growing consumption demands. External factors
include international sanctions against Iran and rising international food and energy14
import prices.
11 (...continued)
the Transition to a Market Economy, IMF, 2007, pp.1-5.
12 IMF, “Regional Economic Outlook: Middle East and Central Asia,” World Economic and
Financial Surveys, May 2008, p. 44.
13 IMF, “Islamic Republic of Iran: 2008 Article IV Consultation ,” IMF Country Report No.

08/284, August 2008, p. 27.

14 Ibid, p. 21.

High inflation is widespread among the oil-exporting countries in the Middle
East and Central Asia, where inflation averaged an estimated 10% in 2007. Among
the oil-exporters, Iran’s inflation level was second only to Iraq (30.8%) in 2007.15
Because of inflation, Iran’s currency, the rial, has been appreciating in real terms
against the U.S. dollar.
Iranians struggle with the rising cost of basic foods, such as rice, chicken, and
eggs, and housing prices,16 which have eroded real wages. The poor are hit hardest
by inflation. It is the poor, mainly from rural areas, who supported President
Ahmadinejad in the 2005 presidential election. Support for Ahmadinejad weakened
marginally during the March 14, 2008 parliamentary elections, despite Iran’s
economic difficulties.
Inflation levels have been associated with Ahmadinejad’s efforts to curb the
interest rate. In May 2007, the interest rate for loans was capped at 12% for private
and state-owned banks, although the Central Bank proposes interest rate hikes. High
levels of inflation also have been associated with a growth in Iran’s money supply.
The Central Bank figures suggest that the money supply growth has been about 40%
The unemployment rate remains high, reaching 12.1% in FY2007.17 At least
one-fifth of Iranians lived below the poverty line in 2002.18 Iran has a young
population19 and each year, about 750,000 Iranians enter the labor market for the first
time, placing pressure on the government to generate new jobs.20 The emigration of
young skilled and educated people continues to pose a problem for Iran. The IMF
reports that Iran has the highest “brain drain” rate in the world.21
Economic Policy and Reform Efforts
Over the past few decades, Iran has engaged in a series of five-year economic
plans in order to shift its state-dominated economy into an economy that is market-

15 IMF, “Regional Economic Outlook: Middle East and Central Asia,” World Economic and
Financial Surveys, May 2008, p. 49.
16 Anne Penketh, “Iran enters new year in sombre mood as economic crisis bites,” The
Independent, March 24, 2008.
17 IMF, “Islamic Republic of Iran: 2008 Article IV Consultation ,” IMF Country Report No.

08/284, August 2008.

18 EIU, “Iran: Country Profile 2007,” p. 33.
19 About 30% of the population estimated to be under age 15 and less than 5% above age

64 in 2004.

20 EIU, “Iran: Country Profile 2007,” p. 33.
21 Anne Penketh, “Iran enters new year in sombre mood as economic crisis bites,” The
Independent, March 24, 2008.

oriented, private sector-led, and economically diversified. Recent efforts toward
economic reform has been mixed because of the stop-and-start nature of reforms and
resistance from various elements of Iran’s political establishment.
Third Five-Year Plan (2000-2004)
Significant attempts at economic reform took place under the third five-year
plan (2000-2004), which advocated greater trade liberalization, diversification of
economic sectors, and movement toward privatization. The government introduced
some structural reforms such as tax policy changes and adoption of new foreign
investment laws to promote Iran’s global market integration and attract investment.
Under former President Mohammed Khatami, Iran shifted to a unified managed float
exchange rate system in March 2002.22 Iran previously maintained a multi-tiered
exchange rate system. Iran has had various combinations of exchange rates,
including official, export, parallel market, and Tehran stock market versions, at
various times. The exchange rate reform is considered to have improved Iran’s
trading environment and to have enhanced public sector transparency modestly.23
Fourth Five-Year Plan (2005-2009)
Iran is currently in its fourth five-year plan (2005-2009), which has taken a
largely populist approach. President Ahmadinejad came to office in 2005 with
promises to redistribute oil wealth toward poorer segments of the population through24
social programs and subsidies.
Redistribution Policies. The Ahmadinejad government has engaged in a
number of expansionary fiscal and monetary policies aimed at reducing poverty and
creating jobs. The government provides extensive public subsidies on gasoline, food,
and housing. Energy subsidies alone represent about 12% of Iran’s GDP. Some
observers estimate total subsidies to reach over 25% of GDP. When including
implicit subsidies, the government’s spending on subsidies may be even higher. In
addition to subsidies, President Ahmadinejad has handed out cash to the needy.
The government has provided low-interest loans for agriculture, tourism, and
industry and has instituted loan forgiveness policies. Other activities include the
creation of a number of social programs to assist farmer and rural residents.25
President Ahmadinejad’s cabinet established the $1.3 billion Imam Reza Mehr Fund
(Imam Reza Compassion Fund) to assist youth with marriage, housing, and education

22 Abdelali Jbili, Vitali Kramarenko, and José Bailénm “Islamic Republic of Iran: Managing
the Transition to a Market Economy,” IMF, 2007.
23 EIU, “Iran rank: Macroeconoimc risk,” January 22, 2008.
24 Ali Alfoneh, “Ahmadinejad versus the Technocrats,” AEI, Middle Eastern Outlook, May

8, 2008.

25 Gareth Smyth, “Middle East: Iran cuts farm lending rate in populist ‘social justice’ move,”
Financial Times, November 15, 2005. Najmeh Bozorgmehr and Roula Khalaf, “World
News - Iran: Bank chief takes a realistic tack,” Financial Times, March 6, 2008.

in 2006.26 As in other Middle Eastern countries, the rising cost of marriage is
financially prohibitive to many young Iranians. Interest-free loans are available to
youth for marriage through the fund.
The government has used oil export revenues from the Oil Stabilization Fund
(OSF) to pay for social spending. The OSF was created by Iran’s Central Bank, the
Bank Markazi, in 2001 to store surplus oil revenue and to smooth economic
vulnerabilities associated with oil price fluctuations.27 The Ahmadinejad government
has been criticized by some analysts for using the OSF for handouts and current
spending rather than storing for future generations.
Economic Mismanagement Concerns. Some critics maintain that
policies under President Ahmadinejad have been a major contributor to budget
deficits and are ineffective tools for combating inflation and unemployment.28
Subsidies and cash handouts are considered by many to un-targeted and ineffective
at helping the poor. The IMF has encouraged Iran to reduce its subsidies.29
Some economists contend that President Ahmadinejad’s efforts to lower the
interest rate may lead to excessive liquidity and inflation. Critics, including the
recently dismissed Iranian finance minister, Davoud Danesh-Jaafari, express concern30
about the inflationary risks of uncurbed growth in the money supply.
Economic concerns continued to erode President Ahmadinejad’s political
support base in the weeks before the March 2008 parliamentary elections.31
Ahmadinejad’s party appeared to emerge from the elections with significant
continued support, but some allege that this is because many reformist candidates
were disqualified from running. Others say that Ahmadinejad’s faction successfully
painted Iran’s economic difficulties as caused by U.S. pressure.
Analysts debate the extent to which Iran’s economic policies are a result of poor
decisions by the Iranian government and sub-optimal choices taken by the
government in response to U.S. and international sanctions. Some economists
believe that the sanctions augment the government’s tendency toward state-led rather

26 Najmeh Bozorgmehr and Gareth Smyth, “Coping with the rising cost of marriage, Iranian-
style: The new president is to set up a fund to deal with rising expectations of the good life,”
Financial Times, November 8, 2005.
27 “Iran: Ahmadi-Nejad populism damages economy,” Oxford Analytica, February 19, 2008.
28 Fredrik Dahl, “Iranians worry about high food prices before vote,” Reuters, March 6,


29 IMF Country Report No. 07/100, “Islamic Republic of Iran: 2006 Article IV
Consultation-Staff Report; Staff Statement; Public Information Notice on the Executive
Board Discussion; and Statement by the Executive Director for the Islamic Republic of
Iran,” March 2007, [].
30 EIU, “Iran: Monetary shrinkage,” April 1, 2008.
31 EIU, “Business outlook: Iran,” March 1, 2008.

than private sector-oriented market policies.32 Given Iran’s vast oil wealth, some
contend that Iran should be experiencing an economic boom at the present time
instead of mediocre economic performance.
Economic Stakeholders
Iran’s economy is still dominated by the state, which is the recipient of revenues
from crude oil exports, and quasi-state actors, such as the bonyads and the
commercial entities of the Islamic Revolutionary Guard Corp (IRGC). Private sector
activity is limited, although the government is engaged in some privatization efforts.
Sometimes referred to as “Islamic congolomerates,” bonyads (Persian for
“foundation”) are semi-private charitable Islamic foundations or trusts that are
believed to wield enormous political and economic power in Iran. They were among
the institutions used by the regime to help nationalize Iran’s economy after the 1979
revolution. Bonyads are not subject to the Iranian government’s checks and balances.
Bonyads report directly to the Supreme Leader and are not subject to parliamentary
supervision. They do not fall under Iran’s General Accounting Law and,
consequently, are not subject to financial audits. Because bonyads are not required
to disclose their financial activities, it is not known exactly the magnitude of their
The largest Iranian charitable trust is the Foundation of the Oppressed and War
Veterans (Bonyad e-Mostazafan va Janbazan, MJF). With more than 200,000
employees and 350 subsidiaries, the MJF has an estimated value of more than $3
billion, at least 10% of Iran’s gross domestic budget (GDP). The MJF provides
financial assistance, medical care, and recreational opportunities to Iran’s poor and
individuals wounded or disabled from the Iran-Iraq war. Through its company
affiliates, the MJF is involved in both Iran’s domestic economy and foreign
economies. The MJF’s domestic economic scope is expansive, with affiliates
involved in economic areas such as agriculture, construction, industries, mining,
transportation, commerce, and tourism. Since 1991, the MJF has invested in energy,
business, engineering, and agricultural activities in Europe, Russia, Asia, the Middle
East, and Africa. Some allege that the MJF is used for Iranian intelligence activities
for buying dual-use products for proliferation of weapons of mass destruction
Many believe that bonyads enjoy a significant advantage over private
companies. Prior to the unification of Iran’s exchange rate system, the bonyads were
able to access foreign exchange at deep discounts compared to private enterprises.

32 Gareth Smyth, “Sanctions fail to fuel dissent on Iran’s streets,” Financial Times, July 24,


33 “Iran: Mostzafan va Janzaban Supports Veterans, Covert Activities,” Open Source Center
report, May 2, 2006.

Presently, bonyad officials have longstanding connections with politicians, and
frequently get special access to credit at state-owned banks.34 In addition, bonyads
get privileges on taxation and import duties. Some critics contend that economic and
political reform in Iran will not be significant unless bonyads are reformed. Some
also contend that they contribute to political corruption and limit the funneling of oil
wealth to the poor. Bonyads also may limit privatization, because shares for many
of Iran’s national companies undergoing privatization are given to bonyads, rather
than wholly private enterprises.
Islamic Revolutionary Guard Corps
The Islamic Revolutionary Guard Corps (IRGC) was founded in 1979 by the
Ayatollah Khomeini and is a branch of the Iranian government’s military. The IRGC
is comprised of five branches: the Grounds Force, Air Force, Navy, Basij militia, and
Qods Force special operations.35
The Islamic Revolutionary Guard Corps increasingly is becoming an important
player in the Iranian economy. The IRGC’s initial economic involvement consisted
of postwar reconstruction activities, largely infrastructure projects. More recently, the
IRGC has become involved in commercial activity in the construction, oil and gas,
and telecommunications sector.36 Elements of the Iranian private sector have
expressed displeasure with the IRGC. Through its powerful connections, the IRGC
frequently acquires business contracts for new projects at the expense of private
sector businesses. The IRGC also serves as a leading investment tool for many of
Iran’s leaders.
Some Iranians express concern that the IRGC is involved in Iran’s underground
economy. The IRGC has significant control over Iran’s borders and airports. The
IRGC is allegedly involved in smuggling alcohol and other low-level contraband into
Iran. Some report that the IRGC smuggles gasoline, which is heavily subsidized in
Iran, to other countries for profit.37
Some analysts believe that the Revolutionary Guard benefits from Iran’s
economic isolation. With foreign businesses unwilling or unable to enter into deals,
the Revolutionary Guard faces less competition for acquiring new contracts.
However, because the IRGC frequently does not have the technical expertise that
many international companies do, the IRGC sometimes subcontracts to international
companies, making a profit as an intermediary in the transaction.38

34 EIU, “Iran risk: Legal and regulatory risk,” January 22, 2008.
35 For more information on the IRGC, see Kenneth Katzman, “The Warriors of Islam: Iran’s
Revolutionary Guard,” Westlaw Press, 1993.
36 Ali Alfoneh, “How Intertwined Are the Revolutionary Guards in Iran’s Economy?,”
American Enterprise Institute, October 22, 2007.
37 Ibid.
38 Ibid.

The United States contends that the IRGC is involved in proliferation of
weapons of mass destruction (WMDs). Under Executive Order (E.O.) 13382, the
United States can sanction entities for proliferation concerns. The sanctions prohibit
all transactions between U.S. persons and the sanctioned entity and freeze any assets
that the sanctioned entity has in the United States.39 On October 25, 2007, under E.O.

13382, the U.S. Department of State designated the IRGC for proliferation concerns.

The U.S. embargo on the IRGC represented the first time that the United States has
sanctioned a foreign country’s military. Also on the same day and under the same
executive order, the U.S. Treasury identified nine companies either owned or
controlled by the IRGC and five individuals associated with IRGC for proliferation
concerns.40 These companies all are reportedly tied to Iran’s energy sector.41 They
are listed below:
!Khatam al-Anbya Construction Headquarters: Main engineering
headquarters of the IRGC; secured deals of at least $7 billion in oil,
gas, transportation, and other sectors42; owned or controlled by the
!Oriental Oil Kish: Drilling company; owned or controlled by the
!Ghorb Nooh: Owned or controlled by the IRGC
!Sahel Consultant Engineering: Owned or controlled by the IRGC
!Sepasad Engineering Company: Owned or controlled by the IRGC
!Omran Sahel: Owned or controlled by the IRGC
!Hara Company: Engineering firm associated with Khatam al-Anbya;
owned or controlled by the IRGC
!Gharagahe Sazandegi Ghaem: Business services company owned or
controlled by the IRGC
!General Hosein Salimi: Commander of the Air Force, IRGC
!Brigadier General Morteza Rezaie: Deputy Commander, IRGC
!Vice Admiral Ali Akhbar Ahmadian: Former Chief of the IRGC
Joint Staff

39 E.O. 13382, “Blocking Property of Weapons of Mass Destruction Proliferators and Their
Supporters,” June 28, 2005.
40 Treasury press release, “Statement by Secretary Paulson on Iran Designations,” October

25, 2007, [].

Treasury press release, “Factsheet: Designation of Iranian Entities and Individuals for
Proliferation Activities and Support for Terrorism,” October 25, 2007,
[ ht t p: / / www.t r pr e ss/ r e l eases/ m] .
41 “U.S. dilemma: Targeting Iran’s oil industry could hurt Iran more,” International Herald
Tribune, November 5, 2007.
42 Treasury press release, “Factsheet: Designation of Iranian Entities and Individuals for
Proliferation Activities and Support for Terrorism,” October 25, 2007,
[ ht t p: / / www.t r pr e ss/ r e l eases/ m] .

!Brigadier General Mohammad Hejazi: Former Commander of Bassij
resistance force
!Brigadier General Qasem Soleimani: Commander of the Qods Force
In addition to WMD proliferation concerns, the United States asserts that the
IRGC is involved in terrorist activities. E.O. 13224 permits the President to freeze
the assets of terrorists and their supporters.43 On October 25, 2007, the United States
sanctioned the IRGC-Qods Force under E.O. 133224. The United States asserts that
the Qods Force provides to Hezbollah’s military and terrorist activities, with
assistance ranging between $100 to $200 million a year.44
Private Sector
Prior to the 1979 revolution, Iran boasted a vibrant, significant private sector.
However, under the leadership of the Ayatollah Khomeini, the bulk of private sector
companies, including commercial banks, were taken over by state and quasi-state
institutions. Foreign participation in Iran’s economy was prohibited.
Currently, wholly private enterprises are present in agriculture, trade, small-
scale manufacturing, and mining, but play a minimal role in large-scale economic
activity.45 In an effort toward more private sector development, Iran began a major
privatization initiative in July 2006. It allowed issuances of up to 80% of shares in
strategic industries through the stock market, including downstream oil sector
businesses, banks, insurance, utilities, and transportation.46 Iran is also working to
privatize state-run oil and gas companies.
Iran’s private sector competes with the businesses operated by the bonyads and
the IRGC. For example, Iranian officials have encouraged foreign companies to
enter into the Iranian market. However, many business contracts have been won by
quasi-state actors, such as the bonyads and commercial entities of the IRGC. In
addition, the private sector is critical of the government’s use of assets in the OSF to
fund state-run companies at the expense of loans to private businesses.47
Some observers are critical of the Iranian government’s continued strong
involvement in the country’s economy. Some Iranians believe that the government

43 E.O. 13224, “Blocking Property and Prohibiting Transactions With Persons Who Commit,
Threaten to Commit, or Support Terrorism,” September 23, 2001.
44 Treasury press release, “Factsheet: Designation of Iranian Entities and Individuals for
Proliferation Activities and Support for Terrorism,” October 25, 2007,
[ ht t p: / / www.t r pr e ss/ r e l eases/ m] .
45 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 12.

46 Ibid.
47 Global Insight, “Iran Country Analysis,” updated July 10, 2008.

needs to invest oil export revenues in Iran’s private sector rather than spending
revenues on imports48 and socially minded programs.
Historically, Iran has been a society of trade merchants, the bazaari class. As
manufacturing in Iran is limited (see below), the merchants import goods, mark up
the goods for profit, and then sell. In order to be economically viable, the bazaaris
need low employment costs, low rents, free trade, and low regulation. The bazaaris
tend to be skeptical of a large government role in the economy. They are supportive
of Iranian trade with foreign countries. However, they tend to be critical of foreign
investment because it would open up their companies to foreign competition.49
Economic Sectors
Iran’s economy has a number of key sectors. In FY2007, oil and gas represented
about 27% of the country’s GDP. Industry, which includes petrochemicals, steel,
textile, and automotive manufacturing, accounted for 17% of the GDP. The services
sector, including financial services, represented 46% of Iran’s economy. Agriculture
constituted about 10% of Iran’s economy.50 Agriculture continues to be one of the
economy’s largest employers, representing one-fifth of all jobs based on a 1991
Oil and Gas
Iran boasts the world’s third largest proven petroleum reserves following Saudi
Arabia and Canada and the second largest gas reserves after Russia. Oil and gas
undoubtedly constitute the most important industrial sector to Iran’s economy. The
oil sector’s share of nominal GDP has declined from 30-40% in the 1970s to 10-20%,
largely due to destruction of production facilities during the war and OPEC output
ceilings. Nevertheless, oil revenue accounts for the majority of export earnings and
represents the bulk of government revenue (about 40%). This sector also receives
the majority of domestic and foreign investment. Some analysts have expressed
concern that excessive focus on the hydrocarbon sector is crowding out investment
and expansion opportunities in other sectors and opportunities for economic
The oil and gas sector is heavily state-dominated. Oil and gas production and
exploration are handled by the state-owned National Iranian Oil Company (NIOC).

48 Ibid.
49 Kenneth Katzman, Specialist in Middle Eastern Affairs, Congressional Research Service,
Joint Economic Committee Hearing on Iran, July 25, 2006.
50 IMF, “Islamic Republic of Iran: 2008 Article IV Consultation ,” IMF Country Report No.
08/284, August 2008. Economic sectors’ contribution to Iran’s GDP is at factor cost with
current prices.
51 EIU, “Country Profile 2007: Iran,” 2007, p. 27.
52 Ibid, pp. 26-27.

A NIOC subsidiary, the National Iranian South Oil Company (NISOC), represents
the majority of local oil production.
Oil. Iran accounts for an estimated 10% of global proven oil reserves
(approximately 136 billion barrels). Most of the crude oil reserves are in the
southwestern region near the Iraqi border. Among the Organization of the Petroleum
Exporting Countries (OPEC) members, Iran is the second largest oil producer
following Saudi Arabia. In 2006, Iran produced about 4.2 million barrels per day
(mbd), approximately 5% of total global production. Iran also is the fourth largest
exporter of crude oil worldwide, after Saudi Arabia, Russia, and Norway.53 Net
crude and product exports in 2006 totaled 2.5 million barrels per day and $54 billion
revenues. Top export markets for Iran are Japan, China, India, South Korea, and
Italy. More than 40% of the world’s oil traded goes through the Strait of Hormuz, a
channel along Iran’s border. The Strait of Hormuz is considered a global
“chokepoint” because of its importance to global energy security. It is a narrow
channel with a width of only 21 miles at its widest point through which large54
volumes of oil are shipped.
While oil export revenues have spiked in recent years due to a surge in oil
prices, Iran’s oil output has remained essentially flat. The government has set a goal
of 5 mbd, which is still below the 6 mbd pre-revolution capacity. Oil production has
been hindered by a number of factors. First, the oil industry faces the high rate of
natural decline of mature oil fields; the decline rate is 8% for onshore fields and even
greater at 10% for offshore fields. Second, oil recovery rates in Iran average between
24% and 27%, much less than the world average. It is believed that millions of
barrels of oil are lost annually because of damage to reservoirs and these natural
declines. Additionally, structural upgrades and access to new technologies, such as
natural gas injections and other enhanced oil recovery efforts, have been limited by55
a lack of investment, due in part to U.S. sanctions. The United States is restricted
from oil development investments in Iran, but other countries, until recently, have
actively invested in Iran’s oil and gas sector development.
Internally, oil export revenues are used to finance discretionary spending by the
government, such as for public subsidies and cash handouts to the poor. Of primary
concern to the United States and the international community is the use of oil export
revenues to finance Iran’s nuclear program and alleged support for terrorist groups.
Surplus oil earnings are directed to the Oil Stabilization Fund (OSF).
Oil Sector Dependence. Iran’s dependence on oil export revenues makes
the country highly susceptible to the volatility of international oil prices. The
quadrupling of global oil prices since 2002 has given Iran enormous economic and
political leverage. Steadily rising oil export revenues provide a cushion to the extent
to which Iran’s economy is affected by international sanctions.

53 Ibid.
54 Energy Information Administration (EIA), “World Transit Oil Chokepoints,” January


55 EIA, “Country Analysis Briefs: Iran,” October 2007.

Economic forecasts suggest that in the near-term, oil prices will not drop, but
any unexpected future drop could cripple Iran’s economy, reducing government
revenue and spending and potentially increasing Iran’s vulnerability to sanctions. An
unanticipated drop in oil prices to below $40 per barrel for more than one quarter
could pose fiscal pressure.56 Oil price drops also would affect the private sector, as
Iran imports a significant portion of its capital and machinery goods from abroad.
A fall in oil prices and subsequent economic downturn may increase political dissent
among Iranians, already facing high unemployment and inflation levels.
A dramatic, unexpected drop in oil prices may be cushioned by a number of
factors. Iran may be able to draw from its OSF to cushion an oil price bust.
However, observers warn that this means Iran would have to restrict its current
spending from the OSF to fund imports.
A widespread embargo on Iranian oil exports would threaten Iran’s economy.
However, this prospect is unlikely, given the fact that Iran is the second largest oil-
producer in OPEC and other oil-producing countries do not have the excess capacity
to make up for a loss of oil supply from Iran.
Because of Iran’s dependency on oil export revenues, Iran is working to
diversify its economy. Non-oil exports, may be able to cushion adverse economic
effects of potential future drops in oil prices. To this end, the country is developing
its natural gas sector. Natural gas production could be used for domestic
consumption, exports to European and Asian markets, and development of Iran’s
petrochemicals industry.57 Other economic sectors that Iran is working to develop
are the manufacturing, agriculture, and services sectors (discussed below).
Natural Gas and Gasoline. With an estimated 15% of the world’s gas
reserves, Iran has the second largest natural gas reserves globally, following Russia.
58 Despite its vast gas resources, Iran has been unable to become a major international
gas exporter. In fact, Iran was a net importer of natural gas as late as 2005. Iran is
the world’s second largest gasoline importer after the United States. Iranian gasoline59
imports were projected to total $5.7 billion in FY2006 and $6.1 billion in FY2007.
About 40% of Iran’s domestic consumption of gasoline is met by imports.
Extensive government subsidies on gasoline have contributed to high gasoline
consumption rates. Many analysts contend that high subsidies do not give Iranians
an incentive to conserve. In addition, there has been an increase in vehicle sales,
particularly of fuel-inefficient older models. Import levels are also high because Iran
has limited domestic refinery capacity to produce light fuels.60 However, gasoline’s
share of imports has fallen recently, from 18% in FY2005 to 6% during the first

56 Global Insight, “Iran: Global Risk Service,” April 1, 2008 update.
57 EIU, “Country Profile 2007: Iran,” 2007, p. 42.
58 Energy Information Administration, “Country Analysis Briefs: Iran,” October 2007.
59 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 29.

60 Energy Information Administration, “Country Analysis Briefs: Iran,” October 2007.

eleven months of FY2007, according to Iran’s Customs Administration. In June
2007, the government implemented a gasoline rationing system to reduce gasoline
consumption. This policy was extremely unpopular and led to public riots, but has
led to a drop in gasoline consumption. Oil consumption also is declining as
consumers are moving more toward natural gas use.
Gasoline Supplies. Major gasoline suppliers to Iran historically have been
India, Turkmenistan, Azerbaijan, the Netherlands, France, Singapore, and the United
Arab Emirates. Iran also imports gasoline from multinational companies (MNCs),
particularly Europe-based wholesalers. Based on data from 2005 through 2006,61
Turkmenistan was Iran’s only supplier of natural gas. In 2006, Vitol, a MNC based
in Switzerland, supplied Iran with 60% of its total gasoline cargo imports. In
December 2007, Vitol reportedly declined to renew long-term contracts with Iran, but
still provides gasoline to Iran on the spot market. Major gasoline suppliers to Iran
include BP, Royal Dutch/Shell (Netherlands), Total (France), Lukoil (Russia), and
Sinopec (China). In addition, Venezuela supplies small quantities of gasoline from
time to time in a show of political solidarity with Iran. Iran and Venezuela have
sought to counter U.S. global influence and strengthen their own international62
standing and reputation through strategic alliances.
Iran would be threatened if it was cut off from imports of gasoline and natural
gas, as the economy is highly dependent on such imports to meet its domestic
consumption demands. This vulnerability was highlighted in December 2007, when
Turkmenistan halted natural gas supplies to Iran in a pricing dispute. Millions of
Iranians suffered from the bitter cold with lack of gasoline for heating during one of
the coldest winters in recent Iranian history. Turkmenistan has since resumed
supplying gasoline to Iran.
Foreign Involvement in Oil and Gas Development. Iran has sought
foreign investment in the development of its gas fields and has sought to increase its
export market of natural gas as well. In the near-term, the petroleum sector appears
to be healthy, but is plagued with aging infrastructure and old technology. In order
to boost oil production to levels to pre-Iran-Iraq war levels and develop refining
capacity, Iran needs international investment.
Foreign activity in the hydrocarbon sector is conducted under a buy-back
system, under which international oil companies contract with an Iranian affiliate,
who receives a fee - such as an “entitlement to oil or gas from development
operation.” In 2006, buybacks were projected to reach $500 million.63 The buyback
system is unpopular and is believed by some analysts to contribute to the lack of
foreign investment and activity in Iran’s hydrocarbon sector.

61 Telephone conversation with EIA official, April 29, 2008.
62 Energy Information Administration, “Country Analysis Briefs: Iran,” October 2007.
Telephone conversation with EIA official, April 29, 2008. Power and Interest News Report
(PINR), “Iran Looks for Allies through Asian and Latin American Partnerships,” May 27,


63 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 29.

Among some more recent deals, Switzerland’s energy company EGL, signed a
25-year LNG export deal with Iran’s National Iranian Gas Export Company on
March 17, 2007, reportedly valued at 18 billion. Switzerland will buy 5.5 billion
cubic meters of Iranian natural gas each year, beginning in 2011. This would be
Europe’s second largest gas deal.64 There is some skepticism that Iran will not be
able to supply gas to Switzerland for the foreseeable future because no pipeline
connects Iran to Europe at present.
In April 2007, OMV, the Austrian partially state-owned energy company, signed
letters of intent with Iran, worth an estimated $22.8 billion (22 billion euros), for Iran
to supply Europe with gas.65 The United States has expressed strong opposition to
both the Swiss and Austrian deals with Iran. The State Department is evaluating the
deals for possible violations of the Iran Sanctions Act.66
Other notable petroleum sector development deals include those with Russia
and China. On February 19, 2008, Russian state gas company Gazprom announced
a deal to establish a joint venture company to develop the offshore Iranian South Pars
gas field. Iran would benefit from a build-up of its gas export infrastructure.67
A China National Offshore Oil Corporation (CNOOC) investment deal, valued
at $16 billion, to develop Iran’s North Pars gas field and to build a liquid natural gas
(LNG) plant, was supposed to be signed on February 27, 2008 but has been delayed.
Some analysts believe that China has been hesitant to finalize the deal because of
international reaction to Iran’s nuclear program and the tightening of United Nations
sanctions. The state-operated National Iranian Oil Company (NIOC) and CNOOC
signed a memorandum of understanding in December 2006 for the project, under
which CNOOC would purchase 10 million metric tons per year of LNG for 25
years.68 The United States has criticized China’s pursuit of the deal with Iran. China
has also looked into alternate suppliers, such as Qatar and Australia.69
The National Iranian Gas Company (NIGC) is expected to finalize a natural gas
export deal with Pakistan in April 2008, with exports set to begin in 2011. The gas
would be transported through a “Peace Pipeline,” worth about $7.4 billion. The plan
initially also included exporting gas to India, but negotiations have stalled over

64 Benjamin Weinthal, “Switzerland to sign second-largest Iran gas deal today,” The
Jerusalem Post, March 17, 2008.
65 Benjamin Weinthal, “Switzerland to sign second-largest Iran gas deal today,” The
Jerusalem Post, March 17, 2008.
66 Eli Lake, “State Department Looks to Sanction Law,” The New York Sun, March 21, 2008.
67 “Gazprom announces gas deals with Iran and Nigeria,” Energy Economist, March 1, 2008.
68 “Chinese delegation to sign major gas deal soon: source,” Platts Commodity News, March

5, 2008.

69 David Winning and Renya Peng, “Update: CNOOC, Iran to Ink Deal for 10 Mln Tons
LNG-Sources,” Dow Jones Newswires, January 21, 2008.

pricing. The United States has strongly opposed the pipeline and pressured India and
Pakistan to halt the project.70
Iran also is discussing a gas production and export deal with Turkey. Under the
plan, Turkey would assist in developing Iran’s South Pars field in exchange for cash
or natural gas. Gas would be shipped from Iran to Turkey and other parts of the
world via a new pipeline that Turkey plans to build.71
The German company Steiner recently announced plans to build three LNG
plants in Iran, valued at 100 million Euros.72 While there has been some international
criticism of this decision, German authorities point out that the deal did not violate
export controls of sensitive goods.73 Iranian officials assert that it will continue to
develop Iran’s gas fields, even with foreigners pulling out investment.
International Sanctions on Oil and Gas Sector Development. The oil
and gas sectors’ susceptibility to international sanctions is debatable. U.N. and some
U.S. sanctions are targeted toward obstructing Iran’s development of its oil and gas
sectors in order to constrain Iran’s resources for uranium enrichment and alleged74
terrorist financing.
U.S. sanctions have limited Iran’s access to technologies from abroad that are
necessary for developing liquid natural gas plants. The intellectual property for these
technologies belong to a small network of U.S. and Japanese companies. Providing
such technologies to Iran would violate the U.S. trade ban on Iran.75
Foreign investment in Iran’s oil and gas sectors is a mixed picture. Foreign
investment has been limited. In part, this is because foreign companies have had
difficulty obtaining financing due to U.S. Treasury Department pressure on76
international banks to cut off ties with Iran, and in part, it is due to the hesitancy of
foreign companies to incur U.S. opposition. Additionally, many U.S. allies are wary
of how their business deals with Iran may affect their relations with the United States.
A number of international energy companies, including British Petroleum, Total,
Royal Dutch Shell, Repsol YPF, StatoilHydro, and Eni have decided to suspend
development projects in Iran. Some companies have decided to continue current77

projects, but to not engage in any future projects with Iran for the time being.
70 “Project News - Iran Finalizing Pakistan Gas Deal,” BMI Industry Insights - Oil & Gas,
Middle East & Africa, March 12, 2008.
71 Turkish Daily News, “Iran, Turkey to Discuss Gas Projects,” May 5, 2008.
72 Rikard Jozwiak, “EU exports to Iran rise,” European Voice, July 8, 2008.
73 Reuters EU Highlights, “EU exports to Iran rising despite sanctions,” August 6, 2008.
74 See Kenneth Katzman, CRS Report RS20871, “The Iran Sanctions Act.”
75 Samuel Ciszuk, “Tightened Iran Sanctions Introduced by UN Security Council in
Anticipation of IAEA Report,” February 22, 2008.
76 “Iran economy: Oil breakthrough?,” Economist Intelligence Unit, December 10, 2007.
77 BMI Industry Insights, “StatoilHydro Pulling Out of Iran, But Pulling In The Profits,”

As European companies have scaled down energy sector development projects,
Iran appears to be successfully negotiating deals with some Asian countries.
However, while new agreements have been negotiated, their successful completion
has been slow. According to a GAO report, State and Treasury officials assert that
U.S. sanctions have contributed to a delay in foreign investment in Iran’s
hydrocarbon sector.78 Others point out that LNG contracts with Asian and Eastern
European countries may not be able to deliver the same quality as Western contracts.
For instance, despite the possible termination of Shells’ LNG project with Iran, Iran
appears to be “keep[ing] open the option of enlisting Shell’s technical and marketing
know-how and financial input for an LNG project linked to a future phase of South
Iran is engaging in efforts to privatize nearly 50 state-run oil and gas companies,
estimated to be worth $90 billion, by 2014 through the Tehran Stock Exchange (see
below). Both domestic and foreign investors would be able to buy shares.
Privatization of these energy companies may make it easier for investors to
circumvent U.S. sanctions, which complicate investors’ ability to engage in business
transactions with Iran directly.80
Iran’s agriculture sector is substantial. Iran is a major source of caviar and
pistachio nuts, which constitute significant non-oil exports for Iran. Iran’s climate
and terrain also support tobacco, tea, wheat and barley, among other food
Iran’s agriculture sector is vulnerable to climate change. For instance, a severe
drought period from 1998 to 2001 was highly damaging to production. Subsequently,
Iran became a major importer of wheat; major suppliers were Canada, Australia,
Argentina, and France. In 2004, Iran did not import wheat for the first time in years.
In addition to climate change, the agricultural sector faced setbacks in production
during the 1979 revolution and the war with Iraq.81 Overfishing and environmental
degradation also threaten the agriculture sector.
Iran typically has used oil export revenues to pay for agricultural imports.
However, rising international food commodity prices combined with a large
population increase have placed pressure on Iran’s economy, despite high

77 (...continued)
August 1, 2008.
78 GAO-08-58, “Iran Sanctions: Impact in Furthering U.S. Objectives Is Unclear and Should
Be Reviewed,” p. 18, December 2007.
79 EIU, “Iran economy: Au revoir LNG? - Country Briefing,” ViewsWire, May 12, 2008.
80 “Tehran opens energy sector to overseas investment,” Middle East Economic Digest,
February 8, 2008.
81 EIU, “Country Profile 2007: Iran,” 2007, pp. 35-36.

international oil prices. Other Middle Eastern countries are experiencing similar
economic strains.82
Iran is working to build up various industries within its manufacturing sector.
There is some concern that Iran’s manufacturing sector has declined because oil
export revenues have increased Iran’s exchange rate, making the manufacturing
sector less competitive. This theory was coined the “Dutch Disease” by The
Economist in 1977 to describe Netherlands’ manufacturing sector in the 1960s
following the discovery of natural gas.83
Steel. Iran is the largest producer of steel in the Middle East.84 In 2006, Iranth
ranked as the 20 largest producer of crude steel globally, with an output of 9.8
million metric tons. Despite Iran’s high production levels, the country is a net
importer of steel. Based on most recently available data from the International Iron
and Steel Institute, Iran was the 14th largest importer of steel in 2005, with net85
imports reaching 6.9 million metric tons. There has been a ramp up of growth in
demand for steel in the Middle East, fueled by the need for investments in energy
project infrastructure and expansion of construction activity. Due to rising demand,
Iran plans to double its steel production by 2010.
Automotives. Iran is the 15th largest motor vehicle producer in the world and
the largest automaker among the Middle Eastern countries. Motor vehicle production
ramped up by 10.3% to 997,240 units in 2007. Iran produces both light and heavy8687
vehicles. Its two biggest automakers are Iran Khodro and Sapia. Auto plants
frequently have outdated technology and parts must be imported through third88
countries. Cars frequently are not fuel-efficient, contributing to pollution. Despite
Iran’s high level of automotive production, domestic demand for motor vehicles
exceeds supply. Iran imports a variety of vehicles, including basic models, luxury
vehicles, and vehicles for construction and mining. Iran reduced the tariff rate on
auto imports in 2006. Iran recently began joint ventures with foreign companies for
auto production, including Peugeot and Citroen (France), Volkswagen (Germany),
Nissan and Toyota (Japan), Kia Motors (South Korea), Proton (Malaysia), and Chery

82 Javier Blas, “Mideast reels as hunger outgrows oil earnings,” Financial Times, May 7,


83 “Economy & Dutch Disease,” Iran Daily, Islamic Republic News Agency, April 24, 2007.
Lionel Beehner, “What Sanctions Mean for Iran’s Economy,” Council on Foreign Relations,
May 5, 2006.
84 EIU, “Country Profile 2007: Iran,” 2007, p. 45.
85 International Iron and Steel Institute, “Major importers and exporters of steel, 2005,”
[ h t t p : / / www.wor l ds t e e l .or g/ ] .
86 International Organization of Motor Vehicles (OICA), “World Motor Vehicle Production
by Country and Type: 2006-2007,” [].
87 Eric Ellis, “Made in Iran,” Fortune Magazine, September 12, 2006.
88 Ibid.

(China).89 Foreign companies have entered the Iranian auto market with some
caution in light of concerns about U.S. reaction and reputational risks.
Food Products. Additionally, there has been a growth in agriculture-related
manufacturing, such as rice milling and manufacturing of canned food and
concentrates, fruit juices, and confectionary. Foreign companies, such as Nestle,
Coca Cola, and Pepsi have signed deals for production with local Iranian
businesses.90 Under U.S. sanctions regulations, foreign subsidiaries of American
companies are able to trade or engage in business in Iran.
Petrochemicals. Iran is the second largest manufacturer of petrochemicals
in the Middle East, following Saudi Arabia. About half of Iran’s petrochemical
product sales are for its domestic market.91 In an attempt to diversify its exports, Iran
also is building up its petrochemicals industry.92 The industry reportedly faces some
challenges from state intervention and price-fixing. Additionally, international
sanctions have reduced commercial banks’ willingness to finance international deals
to build the petrochemical sector.93 According to Iranian Oil Minister Gholam-
Hossein Nozari, Iran’s petrochemical industry needs an estimated $30 billion in
Manufacturing and International Sanctions. Manufacturing activity
reportedly has been impeded by international sanctions. Iranian manufacturing units
rely on imported parts and services from Europe. Access to imported intermediate
goods has been complicated because a number of European banks have scaled down
financial transactions with Iranian businesses.95
Following the 1979 revolution, all of Iran’s banks were nationalized and foreign
banks were banned. Over the past couple of decades, Iran has engaged in some
privatization and liberalization of its financial sector. In 2001, Iran’s Central Bank
approved licenses for three full functioning private banks. Efforts toward
privatization have been thwarted frequently by the Guardian Council. Iran’s financial
sector continues to be heavily dominated by large state-owned banks.
State-owned banks are considered by many to be poorly functioning as financial
intermediaries. Extensive regulations are in place, including controls on rates of

89 EIU, “Country Profile 2007: Iran,” 2007, p. 45. Prime Vista Research and Consulting,
“Automotive Industry and Marketing of Iran 2007,” June 2007.
90 EIU, “Country Profile 2007: Iran,” 2007, p. 46.
91 Global Insights, “Iran Country Analysis,” updated July 10, 2008.
92 EIU, “Country Profile 2007: Iran,” 2007, p. 44.
93 “Iran Petrochemicals Report Q1 2008,” Business Monitor International, February 20,


94 “Iran calls for foreign investments in petrochemical projects,” IRNA, May 17, 2008.
95 Global Insights, “Iran Country Analysis,” updated July 10, 2008.

return and subsidized credit for specific regions. In May 2007, President
Ahmadinejad capped lending rates to 12% for state-owned banks and 13% for
commercial banks, despite strong opposition from the Central Bank. Setting interest
rates below the rate of inflation reportedly has placed many commercial banks under
financial duress.96
Most of the financial intermediaries’ loan portfolios are comprised of low-return
loans to state-owned enterprises and quasi-government agencies, such as the
bonyads. Some believe that the financial system has stifled domestic business and
has lowered Iran’s attractiveness to foreign businesses.
The Bank Markazi, Iran’s Central Bank, is not able to conduct a “proactive”
monetary policy and has no control over the government’s fiscal policy. In addition,
the Central Bank is limited in its ability to issue direct instruments to combat
inflationary pressures. The Central Bank must obtain approval from the Majlis in
order to issue participation papers.97
Tehran Stock Exchange. In 1967, Iran began operating its stock exchange -
the Tehran Stock Exchange (TSE). With initially only six companies, the TSE now
lists over 300 companies. Capitalization through the TSE is permitted for the
automotive, mining, petrochemical, and financial sector. Since 2005, foreign
investors have been able to participate in the TSE. Foreign investors are permitted
to hold a maximum of 10% of shares of each company listed and are not allowed to
withdraw their capital for three years after purchases.
The Tehran Stock Exchange has fluctuated in recent years. The TSE index
performed strongly between 2000 and 2004, rising by more than tripling, but declined
following President Ahmadinejad’s election in 2005. During the 2007, the TSE
market stabilized, but was still 20% lower than before Ahmadinejad came into
power.98 At the end of 2007, TSE market capitalization stood at $46 billion.99 It is
hoped by the Ahmadinejad government that privatization plans will help to revive the
stock market.
Foreign activity in the TSE is low. Aside from concerns about the international
tensions associated with Iran’s nuclear standoff, this may reflect concerns about
liquidity, transparency, and the poor legal environment protecting foreign holdings.100
Financial Sanctions. The U.S. Department of Treasury recently has
employed targeted financial measures against Iran. The United States is attempting
to isolate Iran from the international financial and commercial system in an effort to
promote policy change in Iran regarding its nuclear program and purported terror

96 Ibid.
97 EIU, “Iran economy: Quick View - Monetary strife - Country Briefing,” ViewsWire, April

21, 2008.

98 EIU, “Iran risk: Financial risk,” April 23, 2008.
99 Global Insights, “Iran Country Analysis,” updated July 10, 2008.
100 Ibid.

financing. The United States also hopes that financial isolation will limit Iran’s
resources for its nuclear program and its alleged support for terrorist organizations.
In recent congressional testimony, the Treasury Deputy Assistant Secretary for
Terrorist Financing and Financial Crimes stated, “Iran utilizes the international
financial system as a vehicle to fund these terrorist organizations... the Iranian regime
operates as the central banker of terrorism, spending hundreds of millions of dollars
each year to fund terrorism.”101
Several major Iranian banks are under U.S. and U.N. sanctions. Under E.O.
13224,102 the Treasury has designated several Iranian entities for supporting
terrorism. On October 25, 2007, the Treasury designated Bank Saderat, a major
Iranian state-owned financial institution, for terrorism support. Iranian authorities
contend that two external audits of Bank Saderat conducted in Lebanon and London
found no evidence of such allegations.103
On January 9, 2007, the Treasury sanctioned Bank Sepah, another major Iranian
financial enterprise, under E.O. 13382104 for assisting with Iran’s missile program.105
U.N. Security Council Resolution 1747 named Bank Sepah and Bank Sepah
International as financial institutions involved in financing nuclear or ballistic missile
activities. Subsequently, on October 25, 2007, under E.O. 13382, the Treasury
Department sanctioned Bank Melli and Bank Mellat, other major Iranian financial
institutes, as WMD proliferators or supporters.106 In June 2008, the European Union
also decided to sanction Bank Melli.
In a signal to Arab countries, the United States sanctioned the Bahraini Future
Bank B.S.C. in March 2008 under E.O. 13382 for reportedly assisting in Iran’s
nuclear and missile programs. The United States contends that Future Bank B.S.C.
is controlled by the embargoed Bank Melli.107

101 Daniel Glaser, Testimony before the House Committee on Foreign Affairs Subcommittee
on the Middle East and South Asia and the Subcommittee on Terrorism, Nonproliferation,
and Trade, April 17, 2008, HP-933.
102 E.O. 13224, “Blocking Property and Prohibiting Transactions With Persons Who
Commit, Threaten to Commit, or Support Terrorism,” September 23, 2001.
103 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 17.

104 E.O. 13382, “Blocking Property of Weapons of Mass Destruction Proliferators and Their
Supporters,” June 28, 2005.
105 Treasury press release, “Iran’s Bank Sepah Designated By Treasury,” January 9, 2007,
[ ht t p: / / www.t r pr e ss/ r e l eases/ m] .
106 Treasury press release, “Statement by Secretary Paulson on Iran Designations,” October

25, 2007, []. Treasury press release,

“Factsheet: Designation of Iranian Entities and Individuals for Proliferation Activities and
Support for Terrorism,” October 25, 2007, [].
107 Treasury press release, “Treasury Designates Iran-Controlled Bank for Proliferation:
Future Bank Controlled by Iran’s Bank Melli,” March 12, 2008,
[ ht t p: / / www.t r pr e ss/ r e l eases/ m] .

The United States and some European countries assert that certain Iranian bank
and their branches are attempting to circumvent international financial sanctions in
order to engage in proliferation-related activity and terrorist financing. Iranian
government officials have denied these claims.108
Financial sanctions reportedly have affected the profitability of Iranian banks.
Financial intermediaries have faced challenges financing development projects, such
as building oil infrastructure.109 Iran is taking steps to protect its foreign assets from
future international sanctions. For instance, Iran reportedly has started shifting
billions of dollars from European banks to Iranian and Asian banks and purchasing
gold and equities. However, some economists express concern that Asian banks may
not be reliable because of their close relationship to Europe’s economy.110
Money Laundering. Iran’s financial system may be vulnerable to money
laundering. Since 2002, the Central Bank of Iran has engaged in efforts to combat
money laundering. In January 2008, Iran passed its first anti-money laundering law,
which criminalized money laundering. Critics contend that Iran’s money laundering
framework is not adequate to combat the terrorist financing through Iran’s financial
system. There is international concern that these vulnerabilities pose a threat to the
international financial system.
On March 3, 2008, the U.S. Treasury’s Financial Crime Enforcement Network
(FinCEN) issued a statement emphasizing concern about ongoing deficiencies in
Iran’s efforts to combat money laundering and the financing of terrorism through its
financial system. The U.S. Treasury advisory stated that, using state-owned banks,
Iran “disguises its involvement in proliferation and terrorism activities through an
array of deceptive practices specifically designed to evade detection.” Of particular
concern to the U.S. Treasury is that Iran’s central bank and commercial banks have
requested their names to be removed from international transactions in order to make
it more difficult to track their involvement.
The Treasury advisory noted 59 major Iranian banks or their branches in
international financial cities that pose threats, including Iran’s central bank. None of
the banks listed currently face United Nations or U.S. sanctions.111 The advisory
encouraged all financial institutions to consider the risks associated with doing with
the specified Iranian financial institutions.112 Additionally, the Financial Action Task
Force (FATF), a Paris-based “international financial watchdog,” called on its 34

108 “Iran: Iran Dismisses US Allegations against Banks as Ridiculous,” Thai News Service,
August 18, 2008.
109 “Investment shortfall ‘threatens Iran oil output,” AFX Asia, July 9, 2007.
110 Steven Lee Myers and Nazila Fathi, “European Leaders Back Bush on Iran,” The New
York Times, June 11, 2008.
111 Robin Wright, “Iran a Nuclear Threat, Bush Insists; Experts Say President Is Wrong and
Is Escalating Tensions,” The Washington Post, March 22, 2008.
112 Daniel Dombey and Stephani Kirchgaessner, “Steer clear of Iran central bank, says US,”
Financial Times, March 21, 2008. Jeannine Aversa, “Treasury warns banks that Iran is
engaging in deceptive practices to skirt sanctions,” Associated Press, March 20, 2008.

member states to encourage banks to monitor their financial interactions with Iran.
The FATF alleges that Iran has not taken adequate actions to combat money
laundering and terror financing.113 Iranian officials assert that Iran’s central bank
complies with international best practices and that it vigilantly regulates domestic
financial institutions.
Informal Finance Sector. Many Iranian businesses and individuals also rely
on hawala, an informal trust-based money transfer system that exists in the Middle
East and other Muslim countries. Hawala transactions are based on an honor system,
with no promissory instruments exchanged between the parties and no records of the
transactions. Some analysts consider the hawala system as particularly susceptible
to terrorist financial transactions.
Since the imposition of recent U.S. and U.N. financial sanctions on Iran, the use
of hawala by Iranians reportedly has increased. It is considered by many Iranians as
a more cost-effective way to transfer money in light of the added expenses incurred
through working through the formal financial system in light of the sanctions.
According to a Iranian merchant, “If we wanted to send money through the banking
system it would cost a small fortune, so we move money to dealers and they send the
money through Dubai to China.” While some assert that the use of hawala shows
that Iran is able to successfully circumvent international sanctions, others suggest that
the increased use of hawala is a sign of the sanctions’ effectiveness in making it114
more difficult for Iran to finance transactions.
International Trade
International trade contributes significantly to Iran’s economy and has increased
dramatically over the past few years. Between 2004 to 2007, Iran’s total trade in
goods (exports plus imports) nearly doubled, reaching about $147 billion in 2007.
Iran enjoys a growing and positive trade balance in goods, benefitting from high
international oil prices. This trade surplus registered at about $36 billion in 2007.
Exports totaled about $91 billion, while imports reached about $55 billion that same
year (see Table 2). Some analysts point out that Iran’s trade with the world may
actually be higher due to transshipment or black market trade. Overall, Iran’s external
sector position has strengthened in recent years. The current account balance reached115
an estimated $29 million in 2007, about 10% of Iran’s GDP at market price.
Oil and gas exports dominate Iran’s export revenues, constituting about 80% of
total exports and are the most important source of foreign exchange earnings for the
country. Other major export commodities are petrochemicals, carpets, and fresh and
dried fruits. Top destinations for Iran’s non-oil exports, including natural gas liquids,

113 Jeannine Aversa, “Treasury warns banks that Iran is engaging in deceptive practices to
skirt sanctions,” Associated Press, March 20, 2008.
114 Anna Fifield, “No problem,” Financial Times, April 14, 2008.
115 IMF, “Islamic Republic of Iran: 2008 Article IV Consultation,” August 2008, IMF
Country Report No. 08/284.

are the United Arab Emirates (UAE), Iraq, China, Japan, and India. Major imports
for Iran include gasoline and other refined petroleum products, industrial raw
materials and intermediate goods used as manufacturing inputs, capital goods, food
products, and other consumer goods.
Table 2. Iran Merchandise Trade, FY2004-FY2007
(millions of U.S. dollars)a
Merchandise 2004 2005 2006 2007
Exports 44,36464,36675,53791,289
Oil and gas36,82753,82062,45876,858
Non-oil and gas7,53710,54613,07914,431
Imports 38,199 43,058 49,292 55,352
Gasoline b 2,639 4,190 5,745 6,135
Trade Balance6,16521,28126,24535,938
Total Trade82,563107,451124,829146,641
Sources: IMF, “Islamic Republic of Iran: 2008 Article IV Consultation,” August 2008, IMF
Country Report No. 08/284.
IMF, “Islamic Republic of Iran: 2006Article IV Consultation,” March 2007, IMF Country
Report No. 07/100.
a. All data for 2007 are estimated.
b. Gasoline imports data, based on the “2006 Article IV Consultation,” are preliminary for
2005 and projected for 2006 and 2007. The “2008 Article IV Consultation” does provide
an update on gasoline imports data.
Major Trading Partners
In 2007, Iran’s top overall trading partner was China. Iran’s next overall largest
trading partner is Japan, followed by Italy, South Korea, and Germany. Significant
export markets for Iran are China, Japan, Turkey, and Italy. Major merchandise
suppliers for Iran include Germany, China, the United Arab Emirates, and South
Korea (see Table 3).

Table 3. Major Export Markets and Sources of Imports
for Iran, FY2007
(millions of U.S. dollars)
CountryTotal TradeExportsImportsTrade Balance
China 20,135 12,188 8,017 4,101
Japan 13,064 11,599 1,465 10,134
South Korea8,4215,1393,2821,857
Italy 8 ,039 5,215 2,824 2,391
T urkey 7,539 6,013 1,526 4,487
Germany 6 ,066 621 5,445 -4 ,824
UAE 5 ,915 747 5,168 -4 ,421
France 5,334 3,069 2,265 804
Russia 3 ,272 282 2,990 -2 ,708
Source: IMF, Direction of Trade Statistics
Iran’s trading relations have changed over time as international concern over
Iran’s nuclear program has affected economic activity. Historically, Iran had strong
trade ties with Germany. However, in recent years, Germany and other European
countries have scaled down trade with Iran. Iran’s trade has shifted from the
developed world to the developing world. Asian countries, particularly China and
Japan, Russia and other Central Asian countries, and the Middle East have emerged
as growing and important trading partners for Iran. Figure 3 shows the shift in Iran’s
exports to trading partners is shown in from FY2000 to FY2007, while Figure 4
shows the change in Iran’s import relationships during the same period.
Figure 3. Iran’s Exports to Select Countries, FY2000-FY2007

12,000l a r s Ch in a
l Ja p a n
10,000 Do
. Tu r k e y
8,00 0. S
It a l y
6,000 Of UKorea
4,00 0io ns Fr a n c e
2,00 0M i ll Ge r m a n y
2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF, Direction of Trade Statistics

Figure 4. Iran’s Imports From Select Countries, FY2000-FY2007

7,000olla China
6,000. DGermany
5,000 U.SUAE
4,000 ofSouth Korea
2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF, Direction of Trade Statistics
Germany. Historically, Germany has been one of Iran’s most important
trading partners. However, Germany-Iran trade has declined in recent years, as Iran’s
trade with other countries, particularly China and the United Arab Emirates, has
grown. In 2007, Iran’s exports to Germany increased by 50%, while imports from
Germany declined by 4%. Despite the increase in exports, Iran’s total trade with116
Germany dropped by 0.3% in 2007.
United Arab Emirates and Transshipment Trade. The UAE is a major
trading partner for Iran, with trade largely dominated by UAE exports to Iran.
According to the UAE Ministry of Economy, total non-oil trade between UAE and
Iran was upwards of $6 billion in 2006. The bulk of merchandise supplied to Iran by
the UAE is believed to be products imported into the UAE from foreign markets,
including the United States, European Union, China, and India, and subsequently
repackaged for shipment to Iran. Iran represents about 14% of the UAE’s total
exports, including re-exports. According to the Dubai Chamber of Commerce and
Industry, re-exports accounted for about 60% of the UAE’s $6.8 billion trade with
Iran in 2006. The rest of the trade came from the UAE’s free trade zones. Iran’s
foreign investments in Dubai are more difficult to verify, but may have neared $300
billion, about a quarter of Iran’s total foreign investments.117
The UAE thrives as a central re-exporting and distribution center in the Persian
Gulf because of its low tax rates, free trade zones, lower delivery times, enhanced
handling and service capacity, and a perception of lax export controls. Dubai, in
particular, is Iran’s economic lifeline to the rest of the world. Through Dubai, Iran
is able to import goods that the country cannot import directly due to international
and U.S. sanctions. Although U.S. businesses are outlawed from operating in Iran,
many reportedly can circumvent U.S. sanctions by sending their investments through
116 International Monetary Fund (IMF), Direction of Trade Statistics.
117 Ibid.

The United States increasingly has pressured the UAE to make its export
controls more stringent. Generally speaking, the UAE has resisted such pressure. In
recent months, the UAE appears to be taking actions to regulate trade and investment
relations with Iran in a more stringent manner. In September 2007, the UAE passed
a law permitting it to place restrictions on dual-use technologies, chemical and
biological weaponry, and military equipment. The UAE recently used the new law
for the first time to impound a vessel at Jebel Ali that was delivering merchandise to
be transshipped to Iran.118 About 40 Iranian companies were closed in 2007 based
on UAE efforts to reduce trade in goods with potential “dual use.”119
While UAE-owned banks continue to open letters of credit to back exports from
Iran, some say that it is becoming harder for Iranian-based businesses to obtain letters
of credits from UAE or foreign banks based in Dubai in order to fund imports of
goods into Iran. In particular, some Iranian businesses have witnessed foreign banks’
hesitancy in honoring letters of credit issued by Iranian banks under U.S. sanctions.
UAE-based banks sometimes are wary of how such transactions may be viewed
internationally and presumably concerned about funds being frozen. Consequently,
Iranian businesses have had to shift to other regional banks or have had to engage in
cash-based transactions. Either route has raised the costs of goods on the end-user.120
On the whole, these actions have not hindered transshipment of Iranian products to
the rest of the world or Iranian imports from the rest of the world through Dubai.
Still, some parts of the Iranian business community are concerned about the potential
implications of a more stringent UAE approach to commercial ties with Iran. There
is a possibility that trade diversion to Iran may take place through other countries if
the UAE is perceived as a hostile business environment.121
New Trading Partners. Facing challenges in trading with Western countries,
Iran has pursued increased integration with its neighbors in the Middle East.
Merchandise trade with the Middle East has grown. Arab nations may be weary of
Iran’s nuclear ambitions, but they appear to value trade and investment relations with
Iran. Many are hoping that positive economic engagement with Iran will mitigate
international tensions over Iran’s nuclear ambitions.
Iran has sought to strengthen ties with Asian countries, most notably China and
Japan. Between 2000 and 2007, total trade between Iran and China grew more than
nine-fold, reaching about $20 million in 2007. China was Iran’s biggest exporter in

2007, followed by Japan and Turkey. Iran benefits low-cost imports from China.

Major Chinese exports to Iran include mechanical and electrical equipment and arms.

118 Barbara Surk, “Dubai at center of US efforts to pressure Iran, “Associated Press
Newswires, October 26, 2007.
119 “UAE/Iran: Trade squeeze, or business as usual?”, EIU - Business Middle East, January

16, 2008.

120 Ibid.
121 Ibid.

Iran’s growing trade relationship with China may also be rooted in strategic reasons,
such as China’s position as one of five permanent UNSC members.122
Russia also is becoming an important trading partner for Iran. While Iran-Russia
trade is low compared to Iran’s trade with other countries, this relationship has grown
significantly. Iranian imports from Russia more than tripled from 2000 to 2007 and
registered at about $3 million in 2007.
Several countries in central Asia have declared their interest in boosting
economic engagement with Iran, including Tajikistan.123 Iran, Turkey, and
Azerbaijan have held discussions on building a joint railway through the three
countries in order to enhance relations, trade, and travel.124
U.S.-Iranian Trade. U.S. trade with Iran is limited, receding drastically with
the 1987 U.S. ban on imports from Iran and the 1995 ban on U.S. exports to and
investments in Iran. Before 1995, major U.S. exports to Iran included machinery and
industrial equipment. U.S. exports virtually came to a standstill with the 1995
embargo on U.S. trade and new investment in Iran. Sanctions were relaxed to a
certain extent in 2000, with the election of President Khatami in Iran.
While U.S. trade with Iran is low compared to U.S. trade with other countries,
there has been notable growth in U.S.-Iranian trade. In 2007, U.S. exports to Iran
totaled $145 million, close to double 2006 export levels and more than eight times
greater than 2000 export levels (see Table 4).
Table 4. U.S.-Iranian Trade, FY2000-FY2007
(millions of U.S. dollars)
YearU.S. ExportsU.S. ImportsBalance
Source: U.S. Census Bureau, Foreign Trade Statistics
Currently, the primary U.S. exports to Iran are pharmaceuticals, tobacco
products, wood pulp, and optical and medical instruments. The top U.S. imports from
Iran are textile and floor coverings, art and antiques, fish and seafood (caviar),

122 Global Insight, “Iran Country Report,” updated July 10, 2008.
123 “Tajik speaker says Tajikistan keen on active cooperation with Iran,” ASIA-Plus
Information Agency, March 27, 2008.
124 “Iran, Azerbaijan, Turkey to build joint railway,” BBC Monitoring Caucasus, March 27,


prepared meat and fish, and edible nuts and foods (pistachios). There is evidence that
Iran is able to obtain embargoed U.S. goods through the re-export trade, mainly
through Dubai.125
In general, entities targeted by U.S. sanctions do little business with the United
States. Thus, the United States must rely on its trading partners to not do business
with Iran. According to U.S. Secretary of State Condoleezza Rice, the targeted
financial sanctions are a “powerful deterrent to every international bank and company
that thinks of doing business with the Iranian government.”126 Such sanctions would
have little effect on U.S.-Iran trade since such trade is already limited. However, the
action would send a strong signal to foreign countries and may hurt Iran’s trade with
major trading partners.127
International Sanctions and Trade Financing
The impact of international sanctions on trade financing in Iran is difficult to
gauge. Since 2006, European Union countries, including France, Germany, and
Britain, have curtailed export credits to companies doing business in Iran.128 For
example, in 2007, German export credits backing trade with Iran totaled about $730
million, about half the value of German export credits in 2006 and one-fifth that in

2004.129 Germany does not actively dissuade companies from doing business in Iran,

but it is conducting extra scrutiny of export authorizations requests and evaluating
the financial risks of doing business with Iran more closely.130
Some large European banks have reduced businesses with sanctioned Iranian
bodies. For instance, Germany’s Commerzbank and Deutsche Bank, have been
reducing or stopping business with Iran. The United Kingdom’s HSBC and Standard
Chartered have also reduced business with Iran.131 Many European banks that have
curtailed business with Iran are leaving offices open on a minimal basis in case there
is a change in the international climate towards Iran.132
The merchant class has particularly been hurt by the international sanctions.
Iranian businessmen reportedly have increased difficulty opening bank accounts

125 GAO-08-58, “Iran Sanctions: Impact in Furthering U.S. Objectives Is Unclear and Should
Be Reviewed,” p. 18, December 2007.
126 “Iran sanctions put west’s unity at risk,” Financial Times, October 26, 2007.
127 Glenn R. Simpson, “Democrats Urge Sanctions on Iran’s Central Bank,” The Wall Street
Journal, March 5, 2008.
128 Danielle Pletka, “Congress’s Ill-Timed Iran Bills,” Washington Post, August 28, 2007.
129 Ibid.
130 Bertrand Benoit, “Berlin hardens trade stance with Iran,” Financial Times, February 11,


131 “German imports from Iran up despite nuclear row-paper,” Reuters News, January 8,


132 Samuel Ciszuk, “UN Security Council Tightens Iran Sanctions, Complicating Oil and
Gas Developments and Trade,” Global Insight Daily Analysis, March 4, 2008.

abroad and getting foreign banks to honor letters of credit. According to Iranian
officials, over half of the banks in Dubai no longer provide credit to businesses based
in Iran.133
As Iranian businesses experience setbacks in obtaining trade financing from
international banking partners, they may turn to lesser known banks or to other
banking partners not susceptible to international pressure, but potentially raising the
cost of business. In particular, the Islamic Republic has turned toward banks in Gulf
Cooperation Council (GCC) countries. Bahrain, Qatar, and Dubai in UAE are
viewed as especially critical in propping up Iran’s economy.
Trade Liberalization
In 1995, Iran became a WTO observer state and, since then, has repeatedly put
forth applications to become a permanent WTO member. Accession to the WTO is
a stated priority of the Iranian government. Iran cites the more favorable treatment
that WTO members give to one another and competition from Asian countries in
textiles and manufactures as important challenges to Iranian exports.134 The United
States repeatedly blocked Iran’s bids to join the WTO over concerns about Iran’s
nuclear program and support for terrorist activities. On the other hand, many
European Union countries and developing countries have supported Iran’s accession.
Iran and many other countries maintain that WTO membership should not be based
on political reasons, but rather, on economic and business grounds.135 In a significant
policy shift toward Iran in May 2005, the United States agreed to stop blocking Iran’s
attempts to join the WTO as part of economic incentives to Iran to resolve the
nuclear program issue.
Iran is not currently a member of the WTO and the most recent negotiations for
accession have ceased because of political reasons.136 The WTO accession process
is lengthy and some Iranians have expressed concern that domestic momentum for
the reforms necessary for accession has waned. Iran, along with Russia, now remain
the two largest economies outside of the WTO.
Iran and the Gulf Cooperation Council (GCC) countries137 reportedly have
agreed to engage in trade negotiations. Such talks are notable given the history of
tensions between the Sunni-based GCC countries and the Shia-dominated Islamic

133 Anna Fifield, “No problem,” Financial Times, April 14, 2008.
134 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 18.

135 Fiona Fleck, “Iraq Is Granted Observer Status at the WTO,” The New York Times,
February 12, 2004.
136 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 18.

137 GCC members are Saudi Arabia, Kuwait, the United Arab Emirates, Oman, Qatar, and

Republic. A trade agreement may help mitigate the trade impact of international
Sources of Foreign Exchange
International Reserves
Iran’s international reserves, which include assets in the OSF, have strengthened
in recent years. International reserve levels tend to depend on international oil prices.
Iran’s international reserves grew from $60.5 billion in FY2006 (10.2 months of
imports) to $81.7 billion in FY2007 (11.5 months of imports).139
U.S. efforts to limit Iran’s access to the international finance system and access
to the dollar have contributed to a change in Iran’s composition of foreign reserves.
Iran now refuses to accept payment for oil exports in dollars, and is shifting to other
currencies, such as the euro and the yen. The Central Bank is also reducing the
proportion of dollars in its foreign reserves and diversifying to other currencies.140
Iran reportedly still has a solid external reserves position.
International Investment
As the most populous country in the Middle East, Iran has a significant market
for foreign investment. However, foreign direct investment (FDI) in Iran historically
has been low. In 2005, FDI and portfolio equity in Iran was expected to reach $1.2
billion, up from $776 million in 2004 and $1.1 billion in 2003.141 In contrast,
Turkey, a country of comparable size, was expected to attain FDI of $11 billion in


Iran is slowly letting investors into the country, despite some widespread
resistance within the Iranian parliament (the Majlis) and other parts of government.
FDI has been thwarted to some extent because of Iran’s international relations and
uncertain political environment. A stringent domestic regulatory environment and
government reluctance to allow foreign investment also have contributed to low
levels of FDI. Iran faces a problem of significant domestic capital flight abroad,
particularly to the UAE.

138 Simeon Kerr and Najmeh Bozorgmehr, “Gulf states plan trade talks with Iran,” Financial
Times, September 17, 2007.
139 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

08/284, August 2008.

140 Najmeh Bozorgmehr and Roula Khalaf, “World News - Iran: Bank chief takes a realistic
tack,” Financial Times, March 6, 2008.
141 IMF, “Islamic Republic of Iran: 2006 Article IV Consultation ,” IMF Country Report No.

07/100, March 2007, p. 29.

142 David J. Lynch, “Geopolitics casts pall on hobbled Iranian economy,” USA Today,
September 5, 2006.

International sanctions and political uncertainty have clouded Iran’s economy
and have made foreign business and investors wary about economic involvement in
Iran. International investors reportedly have withdrawn from development projects
in the country, such as in the oil and gas, shipping, and automotive industries.143
A U.S. military attack on Iran may not be completely discounted, but the threat
appears less likely after the release of the December 2007 U.S. National Intelligence
Estimate Report. With the risk of U.S. military action lessened in the eyes of the
government, the Ahmadinejad administration has shifted gears somewhat away from
international politics toward boosting the domestic economy and enhancing trade
In the United States, there has been a growing grassroots movement to divest
from Iran. Divestment is a decision to not hold stock in a company or bank that does
business with Iran. There is a call to remove current stock from such companies.
States such as Louisiana and California recently have passed measures to divest from
Ir a n . 144
International Loans and Assistance
World Bank. Iran receives loans from the World Bank. As of July 31, 2008,
the net principle amount of World Bank loans totaled Iran $3.4 billion, of which $2.5
billion had been disbursed.145 The World Bank currently has nine active portfolios
in Iran, focused on reconstruction efforts. The World Bank’s activity in Iran restarted
in 2000, following a seven year halt. World Bank loans to Iran come only from the
International Bank for Reconstruction and Development (IBRD), the Bank’s market-
rate lending facility. Iran is unable to borrow from the Bank’s International
Development Agency (IDA), a concessional lending and grant-making fund, because
of its per capita GDP. The United States has not made any contributions to the
IBRD, which lends to Iran, since 1996. Some lawmakers call for reducing U.S.
contributions to the IDA in protest of IBRD lending to Iran. However, some question
the merits of penalizing other countries that receive loans from the IDA.
In addition, the World Bank’s International Finance Corporation (IFC) recently
invested in Iran, providing a $5 million joint venture among a Iranian private bank,
a French bank, and the IFC. In addition, Iran has joined the World Bank’s
Multilateral Investment Guarantee Agency (MIGA), which offers political risk146
insurance to foreign and domestic investors in Iran.
Bilateral Official Development Assistance. In terms of bilateral official
development assistance (ODA), major donor countries to Iran are Germany, France,

143 Global Insight, “Iran Country Report,” updated July 10, 2008.
144 “Divesting from Iran: State-by-State Update,” Israel Project news release, accessed via
US Fed News, February 21, 2008.
145 World Bank data accessed August 20, 2008.
146 For more information on World Bank lending to Iran, see Martin A. Weiss and Jonathan
E. Sanford, CRS Report RS22704, “The World Bank and Iran.”

the Netherlands, Norway, and Japan. On the whole, the United States does not
provide foreign assistance, but does provide some humanitarian assistance, to Iran.
For instance, USAID has provided disaster relief assistance following the earthquake
that struck near the Iranian city of Bam on December 26, 2003. Total ODA given by
countries of the Organization for Economic Cooperation and Development (OECD)
to Iran amounted to $71 million in 2006 (see Table 5).
Table 5. Net ODA to Iran from OECD DAC Members, 2001-2006
(millions of U.S. dollars)
Donor 2001 2002 2003 2004 2005 2006
Austria 3.5 3.4 5.7 6.4 4.4 3.4
Germany 32.6 31.8 38.8 41.2 40.6 38.4
France 6.8 7.9 9.5 15.7 14.8 15.4
J a pan 34.4 17.5 11.3 19.8 -2.5a -7.3 a
Netherlands 3.8 3.8 7.7 11.1 6.8 1.0
Norway 3.7 5.3 9.7 11.5 4.3 2.6
United States---
Total DAC Countriesb90.881.5102.1138.978.270.8
Source: OECD, “Geographical Distribution of Financial Flows to Developing Countries,”

2007 and 2008 editions.

a. Negative grants may be due to the return to the owner of unspent balances that were
previously disbursed as grants.
b. OECD DAC members for which data is reported for are Australia, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United
Kingdom, and the United States.
Iran has the lowest foreign debt ratio of any country in the Middle East and
reportedly maintains solid external reserves. During the last oil windfall, Iran paid
off a significant portion of its international debt.
Assessment of Iran’s Economy
External and internal factors affect Iran’s economy, and analysts differ over
which affect the economy most significantly. Based on the above discussion and
analysis, this section reviews some of the major issues facing Iran’s economy.
The main external factors affecting Iran’s economy are international sanctions.
There is considerable debate on the impact of U.S. and U.N. sanctions on Iran’s
economy. According to a recent GAO report, U.S. economic sanctions on Iran have
had affected Iran, but the extent of these effects on Iran’s economy and behavior are
difficult to gauge. The GAO notes that assessment of the impact of sanctions is

challenging because of a lack of data collection by the U.S. government and baseline
information for comparability.147
International tensions associated with Iran’s nuclear program and alleged
financing for terrorist organizations undoubtedly have complicated Iran’s business
environment. Some analysts point to Iran’s low levels of foreign investment,
difficulties obtaining trade finance, and challenges in developing its oil and gas
sectors as evidence of the impact of sanctions. Others suggest that a variety of other
factors, primarily internal, may also affect Iran’s economy. Meanwhile, the Iranian
government maintains that financial isolation efforts have not affected Iran’s
economy. Ayatollah Khamenei recently stated, “We have transformed these threats
and sanctions into opportunities and even according to our enemies we have become
the number one power in the region.”148
Sanctions may not raise the costs to the point that they are crippling to the
Iranian’s trade and financial interactions with the rest of the world. Iran reportedly
is able to circumvent the trade ban by transshipment of U.S. exports through other
countries, such as the UAE. In addition to transshipment, analysts also note that
international sanctions may simply divert Iran’s trade to other countries that do not
enforce sanctions against Iran.
Iran’s economy also faces major internal challenges. A significant challenge is
domestic economic mismanagement. With the election of President Mahmoud
Ahmadinejad in 2005, Iran’s economic policies have worked to reduce regional and
class disparities. Ahmadinejad has focused on redistributing oil wealth and to reduce
unemployment and poverty through expansionary monetary and fiscal policies,
including large energy subsidies and subsidized lending. However, some criticize
these policies for contributing to unemployment and inflation and not reducing
A second internal challenge is Iran’s dependence on its energy sector, which is
the government’s chief source of revenue. Iran has experienced strong economic
growth in recent years due to the rise in international oil prices, but remains
susceptible to oil price volatility. Iran has taken steps to diversify its economy, such
as through building up its non-oil industry sectors.
Because Iran does not have sufficient refining capacity, the country is highly
dependent on gasoline imports to meet domestic consumption needs. To remedy this
dependency, the country is seeking foreign investment to build its gas fields. While
some deals have been finalized, others have been met with limited success. Some
analysts contend reputational and financial risks have limited foreign countries’
willingness to finalize deals.

147 GAO-08-58, “Iran Sanctions: Impact in Furthering U.S. Objectives Is Unclear and Should
Be Reviewed,” p. 18, December 2007.
148 “Khamenei says Iran unafraid of nuclear sanctions,” Agence France Presse, April 30,


While some analysts maintain that Iran’s economy is performing robustly, others
suggest that the economy is underperforming, given the country’s vast resources.
Despite the challenges faced by Iran, most analysts believe that the economy is not
in immediate crisis, given the continued highs in oil prices. However, high inflation
and unemployment levels may eventually translate into serious political dissent in the
U.S. Policy Concerns
Susceptibility of Iran’s Trading Partners to U.S. Pressure
Because the United States does not trade significantly with Iran now, it must
depend on other countries to reduce trade with Iran in an effort to change Iran’s
policies. In December 2005, President Bush remarked, “We are relying on others
because we have sanctioned ourselves out of influence with Iran.”149
There is considerable debate on the extent to which Iran’s trading partners are
susceptible to U.S. pressure to limit economic engagement with Iran. According to
one Asian diplomat in Iran, “The situation over sanctions is a huge opportunity for
China, former Soviet republics and regional countries.”150
Ahmadinejad asserts that foreign interference would not affect expanding
economic relations between Iran and the UAE, Iran’s most important trading partner.
While bilateral trade between the United States and the UAE is significant, UAE
trade with Iran is far greater.151 Both Iran and UAE officials maintain that they would
protect their relations from foreign pressure.152 Despite or because of U.S. sanctions,
Iran has been able to negotiate oil and gas investment deals with developing
countries. However, while new deals have been signed, many countries are
hesitating to finalize them. While various reasons are given as to why the deals have
not been finalized, many speculate that the deals are not closed because of
international concerns over Iran’s nuclear enrichment program and the specter of
sanctions.153 The Iranian government contends that sanctions and international
pressure have not slowed down foreign investment in Iran’s gas sector.
China and India and other developing countries have been highly resistant to
multilateral efforts to widen sanctions on Iran. The United Nations successfully

149 Daniel Dombey and Stephanie Kirchgaessner, “Fresh ways of turning the screw on Iran,”
Financial Times, October 22, 2007.
150 Gareth Smyth, “Sanctions fail to fuel dissent on Iran’s streets,” Financial Times, July 24,


151 Oxford Analytica, “United Arab Emirates: Dubai/Iran trade defies US moves,” April 29,


152 “Iran president says no third party can harm Iran-UAE ties,” BBC Monitoring Middle
East, February 18, 2008.
153 “Iran: Sanctions and threats damage economy,” Oxford Analytica, June 15, 2007.

passed the third round of sanctions against Iran only after watering them down to
satisfy Chinese and Indian concerns. As industrializing countries with increasing
energy demands and insufficient supplies, China and India view Iran as a critical
energy supplier for their needs. Such short-term national interest priorities may
override international long-term security concerns about Iranian alleged terrorist
financing or nuclear technology development. Others suggest that to the extent to
which China and India engage in economic transactions with Iran may be muted
somewhat by the two countries’ ties with the United States.
Middle Eastern countries may be wary of Iran’s alleged nuclear ambitions, but
they value regional stability and assert that economic engagement with Iran may be
the most appropriate means to reduce any belligerent Iranian ambitions. Arab
diplomats note that while they would respect U.N. sanctions against business with
Iran, it is difficult to comply with unilateral U.S. sanctions in light of growing trade
relations with Iran.154
Additionally, there is concern about how U.S. pressure on European and Asian
banks and countries is affecting U.S. international relations. The United States has
derided other countries for not complying with international sanctions against Iran
in order to advance their own economic interests. At an international security
conference in Munich in February 2008, Senator Joseph Lieberman said, “It is
outrageous when Germany makes the principled decision to curtail its exports to Iran
to watch as the People’s Republic of China moves in and exploits that decision for
its own commercial advantage.”155
Impact of Iranian Sanctions on U.S. Economy
The international nuclear standoff with Iran is one of a number of geopolitical
events contributing to higher global oil prices.156 Combined with the subprime
housing crisis, and the cost of the U.S. combative operations in Iraq and Afghanistan,
high oil prices may be fueling an economic recession in the United States. There is
concern that if Iran were cut off from the world market – either because Iran chose
to as a counter-sanctions measure or if there was a general embargo on oil trade with
Iran – oil prices could skyrocket.
In December 2007, Iran stopped accepting payments in U.S. dollars for oil
export purchases by foreign countries. Iran also called upon other OPEC members
to shift away from the dollar in favor of other currencies during a November 2007
OPEC summit. Aside from Venezuela, all other member states opposed the switch.157

154 Jay Solomon, “U.S. Sanctions Bahrain Bank Over Iran,” The Wall Street Journal, March

13, 2008.

155 “Prominent US senator raps China over Iran trade,” Xinhua Financial Network (XFN)
News, February 9, 2008.
156 Steve Hargreaves, “Who’s to blame for $4 gas?,” CNNMoney, May 20, 2008.
157 “Iran stops accepting U.S. dollars for oil,” RIA Novosti, December 8, 2007.

Iran claims that this move away from dollars is in response to the recent slide of
the U.S. dollar, and cited the dollar as an unreliable currency. However, others
contend that this is a retaliatory measure. Iran’s diversification also may be an effort
to seek independence from the dollar in light of punitive U.S. measures against Iran.
This may mitigate U.S. ability to pressure other countries to follow along with
sanctions against Iran.158 For the United States, these recent events may raise
questions about the long-term viability of the U.S. dollar as the global oil currency
and have potential implications for the U.S. economy. U.S. massive current account
deficits are financed by foreign countries’ purchase of U.S. dollar denominated
U.S. sanctions curtail U.S. economic activity, imposing costs on American
workers and businesses and reducing U.S. exports.159 U.S. businesses have expressed
concerns about U.S. measures against companies that are unable to control re-exports
of high-technology goods to Iran and other targeted countries. Others have noted that
U.S. policies in Iran may deprive the United States of significant business
opportunities in Iran. Europe, China, India, and Russia are stepping in and taking
advantage of Iran’s sizeable market and untapped potential. However, even new
countries that are stepping into Iran are proceeding with caution. Undersecretary of
the Treasury Stuart Levey said, “It is clear that many businesses are taking it upon
themselves to scale back [on business with Iran]. At first glance, this may appear to
present a tempting business opportunity for other corporations to step in. However,
there is a reason that these other companies are pulling back: they have decided that
the risks of business with Iran outweigh any potential gain.”160
U.S. Policy Options
Members of Congress appear to be divided about the United States’ course of
action with respect to Iran. Some contend that the United States should pursue
harsher measures against Iran, given the gravity of the real and potential threats posed
by Iran’s uranium enrichment program and terrorism financing. Some Members of
Congress are strongly encouraging the imposition of sanctions on Iran’s Central
Bank. The Administration maintains that Iran is a threat, and continues to push for
more punitive U.S. and international action.
There is debate about whether or not the United States should pursue more
sanctions against Iran unilaterally or work through the United Nations. Some
lawmakers assert that U.S. unilateral efforts to pressure Iran may detract from
building multilateral consensus to widen punitive measures against Iran through the

158 “Iranian oil no longer available for U.S. dollars,” RIA Novosti, December 11, 2007.
159 Jeffrey J. Schott, “The Iran and Libya Sanctions Act of 1996: Results to Date,” Peterson
Institute for International Economics, Testimony before the Committee on International
Relations, U.S. House of Representatives, July 23, 1997.
160 Matthew Levitt, “Pulling Tehran’s Purse Strings: Leveraging Sanctions and Market
Forces to Alter Iranian Behavior,” The Washington Institute for New East Policy, March 15,


United Nations. Some maintain that unilateral efforts also might reduce Iran’s
willingness to cooperate with the United Nations. Additionally, foreign countries,
such as the Persian Gulf states, may not be as responsive to unilateral action by the
United States as they would be to multilateral action, given the growing trade ties
between the Gulf states and Iran.
Others note that pursuing multilateral action can be a lengthy process and that
it is difficult to find consensus among foreign countries with various competing
interests, such as promoting international security and promoting economic growth
through trade with Iran. They note that recent U.N. sanctions have been “watered
down” and took a long time to pass. There is concern about how long it would take
to come to agreement for future sanctions and that, meanwhile, Iran will be
uninhibited in its uranium enrichment activities. Still, many lawmakers consider the
recently-passed third U.N. resolution a good first step and support pushing for more
punitive action through the UNSC.
Some lawmakers question the effectiveness of sanctions, noting that despite
thirty years of sanctions, the United States has not been able to significantly shift the
Iranian government’s policies. Iran contends that its economy is robust and can
withstand the sanctions. According to a GAO report, “Iran’s global trade ties and
leading role in energy production make it difficult for the United States to isolate Iran
and pressure it to reduce proliferation activities and support for terrorism.” The
Peterson Institute for International Economics (IIE) writes that sanctions increasingly
have been unsuccessful as globalization has allowed embargoed countries to find
other suppliers and export destinations for trade and investment.161
Previous studies have found that sanctions have little impact on government
policy. Rather, they tend to hurt the population of a country. In congressional
testimony, one observer stated, “In a broader sense, sanctions often end up hurting
ordinary people while having little impact on the government leaders we are trying
to influence.”162 While the United States recently has focused on applying targeted
financial sanctions to Iran, the effects of these sanctions may spill over to the broader
Iranian populace. There is uncertainty about how sanctions affect the elite, and how
elite views may spillover into government policy.163 Congress may choose to follow
with GAO’s assessment and require the U.S. Treasury and State to collect data to
assess the economic impact of sanctions on Iran. The enforcement of targeted
financial measures appears to signal an effort to avoid the drawbacks of past
sanctions efforts and to concentrate pressure on key negative actors.
Some lawmakers have advocated banning international exports of fuel products
to Iran. For instance, H.Con.Res. 362 calls on the President to prohibit the export to

161 Jeffrey J. Schott, “The Iran and Libya Sanctions Act of 1996: Results to Date,” Peterson
Institute of International Economics, Testimony before the Committee on International
Relations, U.S. House of Representatives, July 23, 1997.
162 William A. Reinsch, President of National Foreign Trade Council and Co-Chairman of
USA*Engage, Testimony before the U.S. Senate Committee on Finance, Regarding S. 970,
The Iran Counter-Proliferation Act of 2007,” April 8, 2008.
163 “Iran: Sanctions and threats damage economy,” Oxford Analytica, June 15, 2007.

Iran of all refined petroleum products.164 Supporters of this option assert that it will
place pressure on the Iranian government, given Iran’s lack of refining capacity and
dependence on gasoline imports. Others express concern that such action would
adversely affect global energy supplies and ramp up prices for U.S. consumers.165
Some critics also maintain that such an action would target the Iranian populace,
more so than the regime.
Some lawmakers question the sincerity of the Administration’s willingness to
apply economic pressure on Iran in a way that harms U.S. commercial interests.
They note that the United States has yet to sanction any U.S. multinational
corporations that do not comply with sanctions laws.
Still others suggest that perhaps the United States should consider more positive
engagement with Iran through rebuilding diplomatic ties and pursuing economic
engagement with Iran, such as through Iran’s accession to the World Trade
Organization. They suggest that the Iranian state would be receptive to sincere
positive engagement on the part of the United States. Some analysts suggest that the
Iranian government is not going to pursue any drastic policy changes currently and
is waiting for a new U.S. Administration, in hopes that it will be more willing to
engage positively with Iran in order to resolve longstanding and outstanding issues.
Recent Congressional Action
In the 110th Congress, several bills have been passed in the House related to Iran.
House-passed bills encourage tighter sanctions against Iran, but note that such action
does not indicate congressional support for U.S. military action against Iran. The
following are some of the major pieces of legislation proposed by lawmakers:
!H.R. 957, “To amend the Iran Sanctions Act of 1996 to expand and
clarify the entities against which sanctions would be imposed,”
would stiffen existing sanctions against Iran. The bill was passed by
the House on July 31, 2007 and referred to Senate committee on
August 3, 2007.
!H.R. 2347, “Iran Sanctions Enabling Act of 2007,” and the
corresponding Senate version of the bill (S. 1430) would encourage
divestment from companies that conduct business with Iran. The
Administration has opposed H.R. 2347 on the grounds that it may
interfere with Administration’s foreign policy efforts. The bill
would allow for sanctions against countries such as China, Russia,

164 H.Con.Res. 362, “Expressing the sense of Congress regarding the threat posed to
international peace, stability in the Middle East, and the vital national security interests of
the United States by Iran’s pursuit of nuclear weapons and regional hegemony, and for other
purposes,” May 22, 2008.
165 Jad Mouawad, “Iran feels West’s grip; Energy troubles carry risks of protests,”
International Herald Tribune, February 13, 2007.

and France for conducting business with Iran.166 H.R. 2347 was
passed by the House on July 31, 2007 and referred to Senate
committee on August 3, 2007.
!H.R. 1400, “The Iran Counter-Proliferation Act of 2007,” and its
companion bill, S. 970, would expand economic sanctions against
Iran and remove the presidential waiver in the Iran-Libya Sanctions
Act. H.R. 1400 was passed by the House on September 25, 2007 and
referred to Senate committee on September 26, 2007.
!H.R. 2798 is a more narrowly targeted measure against Iran. It
would be prohibit any assistance by the Overseas Private Investment
Corporation (OPIC) to individuals who have finance or investment
ties to countries that are state sponsors of terror. The bill would
target Iran, North Korea, and Sudan. The bill was passed by the
House on July 23, 2007 and was ordered to be reported out to the
Senate Committee on Foreign Relations and placed on the Senate
Legislative Calendar on March 4, 2008.
!H.R. 1357, “To require divestiture of current investments in Iran, to
prohibit future investments in Iran, and to require disclosure to
investors of information relating to such investments.” The bill was
referred to House subcommittee on June 5, 2007.

166 Adam Graham-Silverman, “Despite Flurry of Action in House, Congress Unlikely to Act
Against Iran,” Congressional Quarterly Today, September 12, 2007.